How We Got IRS to Let My Client Deduct His Daughter’s Wedding
NOTE: As the warning goes, don’t you kids try this at home. The following story is true. I don’t condone “pushing the envelope” on deductions, but this story illustrates what can be done when you challenge the IRS.
The client came to me at the last minute. The deadline for filing his petition with the US Tax Court was the next day. He had pretty much given up on fighting the IRS and had resigned himself to paying the $70,000-something they asked. But he decided to give it one last shot, and made an appointment with me.
My staff laughed at me when I decided to take the case. Silly, they thought, and brazen, to boot. How could anyone take a deduction for a wedding and expect the IRS to allow it!
However, I knew from experience working at the agency that government regulators generally do NOT make judgments based on content. If the expense served a business purpose, no inquiry would be made as to WHAT the event was.
After all, if big corporations are allowed to deduct for luxury sky boxes at professional sports events, why shouldn’t a small business owner be allowed to deduct for an event that would include networking with some of his business contacts. I thought it was eminently defensible. I was more than ready to take this to trial.
The first step was getting a list of attendees and identifying the ones who arguably had a connection to his business, for example, as vendors, advisers, referral sources and the like. Fortunately, he had good records (a common failing for many small businesses), and we were able to pinpoint the persons.
The next step was to calculate the percentage of attendees who had a business-related purpose. We calculated that number at 30%. That is the second important principle to understand: IRS, and state tax agents, generally will accept a pro-rating of expense between deductible business expense and non-deductible personal expense where there is a reasonable method by which it is done.
Finally, we added up the wedding expenses – making sure he had receipts and proof of payment. This is the third and fourth principle to keep in mind: The burden of proof is on the taxpayer to substantiate the deductions, and a cancelled check is not sufficient without a corresponding invoice from a vendor. (For example, a cancelled check made out to a church may not be deductible as a charitable deduction, since the payment could just a well be for the kid’s parochial school tuition. IRS usually will want to see the invoice.)
Having our paperwork in order, now the next task was to take this up with the IRS Appeals staffer who had been assigned to this case. That’s the next principle to bear in mind: You have nothing to lose by filing a tax court petition. The truth is that very few cases actually go to trial. You will be assigned to an IRS staffer who will attempt to negotiate a settlement.
Be mindful of the fact that your arguments must be based on tax law and you had better have the documentary proof ready – IRS will not settle in this forum just because you ask for mercy. The agency is sizing up the case and deciding they will lose at trial before an independent tax court judge who does not work for the agency. (If you cannot pay, that is a matter to be taken up the collections branch of the agency.)
The documentation was thorough. Surprisingly, IRS never even argued with us about the nature of the wedding as a business event. We said it was (partially). Gave them the list of attendees, documentation for the expenses, and it was accepted!
The client got a substantial discount from his IRS’ bill! He had the funds to pay the reminder and the case was closed with an agreed order with the court.