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Exploring the Deductibility of Tax Attorney Fees in a Settlement

Introduction

When you hire a tax attorney to help you settle a tax dispute with the Internal Revenue Service (IRS), you may be wondering if you can deduct the attorney fees from your taxes. The answer is not straightforward, and it depends on the circumstances of your settlement. In this article, we will explore the deductibility of tax attorney fees in a settlement and provide you with some information to help you understand the tax implications of hiring a tax attorney.

What Are Tax Attorney Fees?

Tax attorney fees are the fees paid to an attorney to represent you in a tax dispute with the IRS. These fees can include the cost of preparing and filing tax returns, negotiating with the IRS, and representing you in court if necessary. Tax attorney fees can be expensive, but they can also be a worthwhile investment if they help you avoid serious tax consequences.

Are Tax Attorney Fees Deductible?

The deductibility of tax attorney fees depends on the nature of your settlement with the IRS. In general, tax attorney fees are deductible if they are incurred for the production or collection of taxable income or for the management, conservation, or maintenance of property held for the production of income. If your tax dispute with the IRS is related to one of these categories, you may be able to deduct your tax attorney fees.

When Are Tax Attorney Fees Not Deductible?

There are situations where tax attorney fees are not deductible. For example, if your tax dispute with the IRS is related to personal expenses or non-income producing activities, your tax attorney fees may not be deductible. Additionally, if your tax dispute results in a settlement or judgment that does not produce taxable income, your tax attorney fees may not be deductible.

How Do You Deduct Tax Attorney Fees?

If your tax attorney fees are deductible, you can deduct them on Schedule A of your tax return as a miscellaneous itemized deduction. However, there are limitations on the amount of miscellaneous itemized deductions you can claim. You can only deduct the amount of miscellaneous itemized deductions that exceeds 2% of your adjusted gross income (AGI).

What Happens If Your Settlement Includes Both Taxable and Non-Taxable Income?

If your settlement with the IRS includes both taxable and non-taxable income, you can only deduct the portion of your tax attorney fees that is related to the production or collection of taxable income. You cannot deduct the portion of your tax attorney fees that is related to the non-taxable income portion of your settlement.

What Happens If Your Settlement Includes Interest and Penalties?

If your settlement with the IRS includes interest and penalties, you may be able to deduct the portion of your tax attorney fees that is related to the interest and penalties. However, you cannot deduct the portion of your tax attorney fees that is related to the underlying tax liability.

Conclusion

Hiring a tax attorney to help you settle a tax dispute with the IRS can be a wise investment, but it can also be expensive. Understanding the deductibility of tax attorney fees in a settlement is important to understanding the true cost of your tax dispute. If you are unsure whether your tax attorney fees are deductible, it's best to consult with a tax professional before filing your tax return.

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