Can You Sue the IRS for Disallowing Deductions Even When You Have Receipts After an Audit Reconsideration?

It's a common question among taxpayers who have faced disallowances of tax deductions even after presenting receipts and receipts are indeed critical, but they alone might not be enough. This article explores the legal avenue of challenging such disallowances in court and the steps you should take.

Understand the Legal Context

Once the IRS has assessed the tax and you have paid it, you can sue in US District Court. However, it's important to note that simply having receipts is not sufficient to document your deductions. The Taxpayer Bill of Rights offers protections, but you still need to provide evidence of a business purpose and that the expenses were ordinary and necessary in the course of your business.

The Importance of Proper Documentation

When your audit isn't in your favor, the first step is not to jump into litigation. The Taxpayer Rights of Appeal Process allows you to file an appeal within 30 days. Before pursuing any legal action, ensure that you have all necessary documentation, including receipts, and consider hiring a professional like an Enrolled Agent, CPA, or tax attorney. They can help you navigate the complex laws and procedures effectively.

Legal Options Beyond the Initial Appeal

If you've filed and exhausted all available appeals, your next steps are clear: you can either File in Tax Court, orPay the tax, file a claim for refund, and if that is rejected, sue in District Court.

It's crucial to understand that even with receipts, the IRS may still disallow deductions if the expenses are not deductible. For example, spending $2,000 on neck and shoulder massages as medical expenses would likely be disallowed unless you can prove that the massages were ordered by a physician and were medically necessary. Insurance coverage is another relevant factor.

Understanding Deductible Expenses

Just because you can verify payment for an expense doesn't mean the IRS will consider it deductible. Here are the key questions you need to ask:

For instance, claiming massagist services as a medical expense without a doctor's prescription could easily be disallowed. The onus is on you to prove that your expenses meet the IRS criteria for deductibility. The IRS does not need to prove anything; they need you to prove that the expenses meet the legal requirements.