Archive for Medical Expenses
Medical expenses include amounts paid for the diagnosis, cure,
mitigation, treatment, or prevention of disease under IRC 213, as well as amounts paid for qualified long-term care services under IRC 7702B. You may deduct certain medical expenses that are paid during the year and that are not compensated for by insurance to the extent that the expenses exceed 7.5% of your adjusted gross income. This is done as an itemized deduction on schedule A of form 1040.
This is reinforced by the tax court case of Estate of Lillian Baral, Deceased, David H. Baral, Administrator, Petitioner v.
Commissioner of Internal Revenue, Respondent 137 T.C. No.1
According to IRC Sec. 7702B(c) the term qualified long-term care services means the necessary diagnostic, preventative, therapeutic, curing, treating, mitigating, and rehabilitative services and maintenance or personal care services required by a chronically-ill individual and provided pursuant to a plan of care prescribed by a licensed health care practitioner.
A chronically-ill individual means any individual who has been certified by a licensed health care practitioner as, among other conditions, requiring substantial supervision to protect the individual from threats to health and safety due to severe
A licensed health care practitioner means any physician,
registered professional nurse, licensed social worker, or other individual who meets requirements prescribed by the
Attached is the summary of the IRS Stakeholder Liaison Meeting I attended on January 4th 2012 in Denver, Colorado as produced by Deborah Rodgers of the IRS. Some interesting insights were revisited. The most provocative discussion surrounded the comments made by Matthew Houtsma of District Counsel regarding the taxation of medical marijuana specifically as it pertains to cost of goods sold as well as further defining what constitutes “traffic” under IRC 280(e)
Jack Estoll, Appeals
This is Jack’s last meeting. He will retire on June 1st. Linda Alden, Appeals Team Manager will replace Jack at the PLM meetings. Welcome Linda. Appeals lost 3 processors and 1 analyst to the buyouts in December. Processing will be slowed due to those retirements; Appeals will not fill the retired positions. Examination inventory is decreasing, while Collection inventory is still increasing.
Patience Ellis, Automated Collection Site (ACS)
ACS is business as usual. We are 60 people short compared to a year and a half ago. ACS has instituted some internal process improvements. We have an abbreviated financial information statement. We are using a probe and response guide for offers in compromise, which will ask the right questions to determine if a tp wants to move forward with the offer in compromise process.
Question: How are $100,000 cases handled in ACS?
Response: With the large dollar case unit going away, there are limited things that can bring the balance down. ACS is limited with large dollar cases. Generally they will go to the field.
Question: If taxpayer is compliant and doesn’t want to wait can we writeCincinnati?
Response: You can always write toCincinnatibut process time is 45 to 60 days.
Question: Are you raising the streamline installment agreements from $25,000-$50,000?
Response: Yes, ACS Denver has been part of a pilot that has tested the increase to $50,000. Based upon the positive input and increase in efficiency, the process is projected to rollout in late January in all ACS call sites.Denverwill work Small Business cases and Seattle will work Wage and Investment cases.
Question: Will the filling of Liens change?
Response: The employees will still need to make the lien determination; there is no change to that basic process. A lien can be avoided by entering into a DDIA agreement for $25-$50k and streamline for under $25k.
Comment: 800-829-0115 telephone number gives you an estimated wait time of 15 minutes, in reality the wait time is over one hour.
Response: ACS called the number and the automated system advised at the beginning of call that hold time would be greater than 30 minutes. After being on hold for 55 minutes a representative answered and she said that this number belongs to Accounts Management W&I.
ACS’s automated line 1-800-829-3903 does not give any approximate hold time.
We will elevate this issue.
Shelley Foster, Examination
There are significant losses to resources in our 12 Western states. We are down to 90 employees in 12 states. The work plan has been reduced by 3500 returns. Business master file work has increased from 10% to 18%.
We are striving to reduce the time span between initial contact and holding the interview. Phase 1 of the audit process, with a target of completing the first interview within 45 days of the first contact. There will be a big push on this practice in the future.
We are at 95% closure on all open offshore voluntary disclosure cases within the Western Area. These are cases from the 2009 initiative. The time frame has passed for submitting disclosures for the 2011 initiative. Large Business and International has the lead on the 2011 initiative. Small Business/Self Employed will take some of the disclosure due to the projected number of disclosures. Western has dedicated 23 revenue agents to the 2011 program.
The budget is not affecting case related travel. The fallout for non-case related travel or hiring plans is not known at this time. We lost support staff throughout the Area which is impacting operations.
Question: What about the electronic software issue?
Response: This is still being worked, however, our examiners are advised to only look at information tied to the year(s) under audit which may include the month before and month after the end of the tax year.
Question: What is the number of taxpayers on the new voluntary disclosure program?
Response: Significantly more were received under this program the figures are in excess of 16,000.
Question: What are some of the audit hot topics?
Response: Hi DIF scores; audit selections based on historical audit adjustments, high income taxpayers with over $200,000 with and without Schedule Cs, over $1 million income taxpayers, business flow-through returns, and some Schedule A return projects.
Question: Time for closures?
Response: We want to close a case within reasonable time frames. It’s case-by-case based on the complexity of the return and the issues identified. Availability of records can delay the process. The guidance to managers is to get involved earlier in the process to ensure cases are move forward in a timely manner.
Question: Is it appropriate to move an audit out of state?
Response: A request to move an audit out of state can be denied for various reasons including where the taxpayer, business and records are located.
Comment: I received a proposed adjustment with the initial letter from office audit.
Response: If there is no response to the initial contact letter then we often issue a proposed audit report based on the issues classified. This would not happen unless a discontinuance of communication occurred or there was no response from the taxpayer.
Question: Is there any guidance on medical marijuana dispensary expenses?
Response: Subject is still under review by Counsel. Under federal law it is illegal so some of the expenses may be disallowed.
Comment from Counsel: There is a memo from counsel to local agents that cost of goods sold are allowable. Trafficking expenses are not allowed. Counsel mentioned the CHAMP case (128 T.C. No. 14 (2007)) where the dispensary did documentable care type work with patients. The expenses related to the care giving were allowed. Code section 280E should be followed. This is an evolving area. Agents are coming to Counsel on a case-by-case basis. The National Cannabis Industry Association memo that appeared in Tax Notes in2011 and was partially drafted by local CPA Jim Marty is not accepted by Counsel. Watch for the Harborside Health Center case in California.
Question: The salaries of the employees are being taxed but you are not allowing the deductions. Is this inconsistent?
Response: No it is not inconsistent. Behind the counter employees are deemed trafficking, therefore not deductable.
Question: Is the tour of a medical marijuana dispensary protocol?
Response: Businesses have not pushed back visits from revenue agents. It would be in their best interest to explain how the business is run. It is to get their side of the story out. Since Counsel is providing guidance we should take a look at how the business runs.
Matthew Houtsma, District Counsel
Counsel has experienced a few retirements, which included a manager. There will be a new manager coming in February. Counsel had another victory in an easement case recently. We have several easement cases on the calendar for court in March and May. We handle abusive Roth IRA cases for the whole country.
We started developing products to capture knowledge of retiring attorneys on our website.
There is a push to get summary judgment on collection due process cases. Attorneys are advised to ask the taxpayer early whether or not they object to summary judgment.
Charles Musso, Taxpayer Advocate
Local Taxpayer Advocate, Tom Sherwood is back from his detail.
Our inventory levels are down from 90 cases to about 40 cases per case advocate.
One of the changes to TAS criteria is to send amended returns back to the function.
Comment: Taxpayer Advocate received positive feedback that TAS case advocates were incredibly helpful and moved quickly through the practitioners’ issues.
Diane Sandoval, Collection
Staffing has dropped, but case related travel has not declined. Revenue officers will still be in the field. Collection focus areas include timeliness of actions, to resolve case as quickly as possible, and customer satisfaction- to communicate resolution to the taxpayer. Regarding power of attorney bypassing issue, if there is an unreasonable delay of turning over information or a pattern of no cooperation, bypass procedures will be initiated.
Taxpayers with over $100,000 balance due are encouraged to stay current in their tax matters. Also be prepared when a revenue officer knocks on the door. Resources are strained and we have many cases waiting to be worked. If there is a combative relationship between the practitioner and a revenue officer contact the group manager.
Question: The bypass issue is a more serious issue for the practitioner with the active Office of Professional Responsibility. Has there been any thought given to issuing a summons for the information that the client is not providing to the power of attorney? The practitioner doesn’t want to compromise his position with the client but is there something in the manual that suggests a summons is the next step?
Response: Warning of a bypass procedure is issued by the group manager. The actual bypass document is signed by the territory manager. Practitioner should talk to the group manager if you are issued a bypass warning letter. This is the time to consider revocation of power of attorney. When issuing a bypass letter we asked the revenue officer what they tried to do to get the information. Did they issue a summons?
Comment: Practitioner has received letters with a ghost name on them. When he calls the case has not yet been assigned.
Response: Field collection knocks on the door.
Question: If the taxpayer wants to get something resolved, can they request a revenue officer?
Response: A request for a revenue officer can be made but there are no guarantees.
Lilia Ruiz, Criminal Investigation
Our staffing is fairly steady in our states. We continue to investigate allegations of tax fraud in many areas including employment tax, money laundering, non-filers, abusive schemes, international, questionable returns,ID theft. Joel Churches is no longer the voluntary disclosure contact. Brian Thiel is the new contact. His number is 303-603-4924.
Regarding the medical marijuana issue, the US attorney’s office is proceeding cautiously across state lines. Montana is more aggressive.
Question: Can you pursue both a FBAR and criminal tax audit at the same time? Is Title 31 versus title 26 issues in conflict? Can the revenue agent do both audits or must they be separate? Revenue agent is asking for FBAR information on a civil audit.
Response (from various participants): A regular RA can do a Title 31 FBAR examination under certain circumstances. The foreign account has to be related a Title 26 violation. So, for instance, if the interest from the account was not reported on the return, the failure to report is a Title 26 violation. If everything was properly reported, then the regular RA would not be able to open up the FBAR examination. When processing to open one, a Related Statute Memorandum must be done and approved by the TM. Then, the RA can work both. Each would still be a separate case, separate activity codes, etc.
I think where the confusion lies is due to a technicality. The RA can ask anything they want about the account, but cannot ask about the FBAR form…until the Related Statute Memorandum is approved. Since it’s such a subtle item, it can really feel like an FBAR account. But if you think about it, it’s no different than what they might ask about a domestic account. Who are the signers, account balances, copies of statements, etc. It’s the form itself that throws it under Title 31.
Bessie Castro-Zepeda, Department of Revenue
At the moment we have 3000 work-as compared to 20,000 latest years. All items are under 20 days old. Practitioners are encouraged to use the online system. The phone system has a longer wait time. When you file an amended return, include original forms and backup information or your credits will be disallowed.
Question: Will there be an e-file debit account for payment on return program this year?
Question: Regarding the amnesty return information program, do you share information with federal government?
Question: What is taxpayers’ protection if rejected from the voluntary classification settlement?
Question: Contractors’ agreements? Voluntary? Department of Labor issue?
Question: Are you pursuing violators of the Colorado use tax?
Response: We only address issue in audits-not as a project.
Kristen Hoiby, Stakeholder Liaison
The revised Form 2848 and instructions issued Oct. 2011 include several changes. One of the most significant changes is for individuals who file joint returns. Each individual taxpayer will be required to submit separate Forms 2848 to the IRS Centralized Authorization File even if they are going to be represented by the same authorized representative(s). The individual(s) identified in the power of attorney will only be authorized to represent one person per Form 2848.
Question: Are there any plans to develop a simpler way to revoke a power of attorney?
Response: This question has been elevated.
Stakeholder Liaison is looking at other ways to deliver information virtually in order to deal with a lower travel budget—if practitioners know of any webinar or other systems that could be used for delivering updates, please let SL know.
There is a concentrated place for frequently asked questions and information on payment card reporting requirements on our website.
The IRS website has been redesigned. The frequently asked questions or many topics are from meetings like our PLM.
The IRS is aware some taxpayers who are dual citizens of the United States and a foreign country may have failed to timely file United States federal income tax returns or Reports of Foreign Bank and Financial Accounts (FBARs), despite being required to do so. Some of those taxpayers are now aware of their filing obligations and seek to come into compliance with the law. This fact sheet summarizes information about federal income tax return and FBAR filing requirements, how to file a federal income tax return or FBAR, and potential penalties.
Beginning Jan. 3, hours of service for most IRS toll-free telephone lines will be 7:00 a.m. to 7:00 p.m. local time. This includes telephone assistance for individuals, businesses, and the Practitioner Priority Service. Hours of service for telephone assistance for exempt organizations, retirement plan administrators and government entities are not changing. As a reminder, the IRS is available online 24 hours a day, 7 days a week, for you and your clients
A six-digit Identity Protection Personal Identification Number or IP PIN is being provided to those victims of tax-related identity theft who have had their identities verified by IRS to avoid delays in processing their federal returns. If your client indicates he or she received IRS Letter 4869CS providing them with an IP PIN, please ask your client for the letter and follow the instructions provided when preparing the return.
Important: If your client received an IP PIN, please enter it on the tax return to avoid processing delays. For electronic returns, the software will indicate where to insert the IP PIN. For paper returns, enter the IP PIN in the six boxes to the right of the spouse’s occupation in the signature section. Tax professionals may send general inquiries to-IPPIN.Questions@irs.gov. IRS Identity Protection Specialized Unit, toll-free 1-800-908-4490.
Question: Where can I get the green card information?
Response: Fact sheet 2011-13.
Question: With more practitioners being able to use the services, will it become more user-friendly? And the adjusted gross income precludes some from using e-services.
Certain tax return preparers are required to take and pass a competency test. View a summary of the return preparer requirements
Scheduling a Test:
In order to take the test, you must have a PTIN. You can schedule your test directly from your online PTIN account.
Question: Do we need to fill out the opt out form for e-file if the obvious reason is that the credit taken is not a form accepted for e-file, such as the adoption credit?
Response: Covered returns that cannot be filed electronically. Some covered returns are not currently capable of being accepted electronically by the IRS. In certain instances, the IRS has instructed taxpayers not to file some covered returns electronically. Additionally, certain covered returns cannot be e-filed if they have attached forms, schedules, or documents that the IRS does not accept electronically and these forms, schedules, or documents cannot be sent to the IRS separately using Form 8453 or Form 8453-F as a transmittal document. In any of these situations, the preparer does not need to complete and submit Form 8948. However, if the forms, schedules, or documents can be sent to the IRS separately using Form 8453 or Form 8453-F as a transmittal document, the rest of the return must be e-filed. For more information, see Form 8453, Form 8453-F, and Notice 2011-26, 2011-17 I.R.B. 720.
The Issue Management Resolution System is a streamlined, structured process that captures, develops and responds to significant national and local issues from tax practitioners and other stakeholders.
Check out this month’s IMRS Hot Issues report.
Thank you for your participation in this meeting.
Next meeting is scheduled for July 18, 2012.
Under Internal Revenue Code §213 an expense is considered for medical care if it is paid for the diagnosis, cure, mitigation, treatment or prevention of disease. It is deductible on the taxpayer’s Schedule A, subject to 7.5 percent of adjusted gross income for the year. However under Reg. §1.213-1(e)(1)(ii), expenses incurred for items that are merely beneﬁcial to the general health of an individual are not deductible.
The IRS has concluded that breast pumps and supplies that
assist in lactation are deductible as medical expenses under §213
because, like obstetric care, they are for the purpose of affecting the structure or function of the body of lactating women. In addition, amounts reimbursed for these expenses under a ﬂexible spending arrangement (FSA), an Archer medical savings account (Archer MSA), a health reimbursement arrangement (HRA) or a
health savings account (HSA) are not income to the taxpayer.
IRS Notice 2011-68 provides interim guidance on the federal income tax treatment of annuity and life insurance contracts with a qualified long-term care insurance (QLTC) feature. The guidelines address the application of certain changes to the federal income tax rules governing annuity and life insurance contracts as well.
All taxpayers are invited to provide comments for final regulations on or before November 9, 2011 which will be made available for public viewing. There are 3 ways to submit comments. Which ever way chosen should contain a reference to this Notice 2011-68.
1. Via US Mail to:CC:PA:LPD:PR (Notice 2011-68), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044.
2. Via email to: Notice.Comments@irscounsel.treas.gov - Include “Notice 2011-68” in the subject line.
3. Hand-delivered Monday through Friday between the
hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (Notice 2011-68), Courier’s Desk, Internal Revenue Service, 1111 Constitution Ave., NW, Washington, DC 20224.
If you have any questions the principal author of this notice is Rebecca L. Baxter of the Office of Associate Chief Counsel – Financial Institutions & Products. She can be reached at (202) 622-7117
Generally you can deduct expenses paid for medical care for yourself, your spouse and your dependents to the extent the total
expenses for the year exceed 7.5 percent of your adjusted gross income and you itemize your deductions (Schedule A). IRS Pub. 502, Medical and Dental Expense, has valuable information on the topic.
Medical care essentially according to the IRS is the amount paid for the diagnosis, cure, mitigation, treatment or prevention of disease, or for the purpose of affecting a structure or function of the body. Deductible medical care expenses from the perspective of the IRS are limited to those expenses incurred for the prevention or alleviation of a physical or mental defect or illness.
According to Reg. §1.213-1(e)(1)(ii) taxpayers cannot deduct personal, family or living expenses as medical care if the expense is merely beneﬁcial to the general health of an individual and not for actual medical care. In order to claim an expense is for medical care you must establish the factors that indicate an otherwise personal expense is actually for medical care by carefully documenting and preserving the following:
• Motive or purpose for making the expenditure;
• Physician’s diagnosis of a medical condition and recommendation of the item as treatment or mitigation;
• The relationship between the treatment and the illness;
• The treatment’s effectiveness;and
• The proximity in time to the onset or recurrence of a disease.
Also you need to prove that you would not have paid the expense had it not been for the disease or illness. According to the Tax Court case of the Commissioner v. Jacobs, 62 T.C. 813 (1974) if you would have paid the expense regardless of a medical condition, no medical expense deduction is allowed.
According to IRS Revenue Rule 55-261 the fees paid to a health facility where you exercise may be deductible as medical expenses if a physician prescribes the treatments and provides a statement that the treatments are necessary for the alleviation of a physical or mental defect or illness. In addition according to IRS Revenue Rule 79-151, in order to deduct a fee for participation in a weight-loss program as a medical expense, it must be for the purpose of curing a speciﬁc ailment or disease, and not simply to improve one’s appearance, general health or sense of well being. Last IRS Revenue Rule 2002-19 states that amounts an individual pays for participation in a weight loss program to treat a speciﬁc disease, such as obesity or hypertension, as diagnosed by a board certified physician are considered legitimate expenses for medical care that a taxpayer can deduct.
In response to a very specific question I was asked today it appears you may be able to deduct gym fees as a medical expense if you can establish that:
• A physician diagnosed you with a speciﬁc disease;
• You use the gym to treat the speciﬁc disease; and
• You would not incur the gym fees except for the speciﬁc disease.
So yes I think I can successfully defend a return with that issue on appeal but please don’t expect me to sign a return of that nature. I have way to many headaches as it is.
Many medical costs are deductible including the cost of treatment to alleviate conditions or diseases and the cost of prescriptions and certain diagnostic services. Additional deductible medical expenses include:
Capital expenses for special equipment installed in, or improvements made to, a home that provides a medical benefit; these include wider doorways, entrance ramps, modified bathroom or kitchen equipment, and swimming pools for therapeutic purposes.
Cosmetic surgery, if necessary to improve a deformity related to a congenital abnormality, accident, or disease.
Dental treatments, including braces and dentures.
Meals and lodging, if the stay is at a hospital or similar institution to obtain medical care.
Orthopedic shoes (extra cost over regular shoes).
Oxygen and equipment used to relieve medical breathing problems.
Smoking cessation programs and prescribed drugs to alleviate nicotine withdrawal.
Visual alert systems for the hearing-impaired.
Medical aids such as wheelchairs, hearing aids, crutches, needles, and other diagnostic devices such as blood sugar kits.
Guide dogs or other animals used by taxpayers who are visually or hearing impaired or are otherwise disabled.
Weight loss programs as treatment for a specific disease; obesity is a disease as long as diagnosed by a physician. The Tax Court has allowed the extra cost for special diets over the cost of a normal diet when prescribed by a physician to alleviate a specific medical condition.
Alcohol and drug addiction treatment, meals, and lodging at a therapeutic center for addictions.
Tuition for day-camp programs designed for children with disabilities.
The cost of hand controls for a vehicle for the physically handicapped, or the extra cost to design a vehicle to hold a wheelchair.
Detachable items such as air conditioners, heaters, humidifiers, and air cleaners used for the benefit of a sick person or for the relief of allergies or other respiratory ailments.
Laser eye surgery that meaningfully promotes the proper function of the eyes; vision correction with eyeglasses or contact lenses is also allowed.
Out-of-pocket transportation expenses for medical reasons
Medical expenses that are not deductible include the following:
Diaper services (unless needed to relieve the effects of a particular disease).
Dancing lessons, even if recommended by a physician.
Exercise programs to improve general health, even if recommended by a physician.
Marijuana, even if legal under state law when prescribed by a physician in the state where the taxpayer lives.
Health club dues (unless they are related to a specific medical condition).
Vitamins and other nutritional supplements (unless prescribed by a physician as treatment for a specific, diagnosed medical condition.
For an extensive list of allowable medical expense deductions see IRS Publication 502, Medical & Dental Expenses.
You may only deduct the amount of expenses in excess of 7.5% of adjusted gross income. If deductions on Schedule A (including medical expenses) are not more than the standard deduction, they may not prove helpful on the federal return, though in many states they may become advantageous.
Medical expenses are reduced by payments from insurance or other sources. Payments received for the permanent loss or use of a member or function of the body, for loss of earnings related to a physical injury, or damages due to personal injury or sickness do not reduce expenses.
Publication 4345, Settlements – Taxability, reviews those payments which may be taxable.
The one thing that many people over look is that excess reimbursements for medical expenses may need to be included in income. If you are reimbursed the amount up to the deduction must be included in income if it was previously deducted.
Taxpayers may also be able to claim expenses for themselves as well as other qualifying persons. A good example of this might be expenses for a parent for whom over half the support is provided.
Under §213, a taxpayer is allowed to deduct the cost of preventing, treating, curing, mitigating, and diagnosing a disease that is existing or imminently probable for themselves or a family member.
Doctors now can store cord blood of an infant that contains stem cells that may be used to treat or cure a disease. However, the cost to collect or store umbilical cord blood of an infant is not a deductible medical expense if the disease that they are storing the blood for is not imminent. The cost of the collection and storage based on possible future diseases that may arise in the child are nondeductible. If the disease for which the cord blood is stored is imminent, the cost to store the blood can be determined to be a deductible medical expense relating to the prevention of an imminent medical disease.
Report the deduction on the Schedule ‘A’ – even if the parent did not meet the gross income requirements for the dependency exemption, the parent will still meet the definition of a dependent for purposes of medical expenses paid according to CFR 26 Section 213(a).
To answer a specific question, a parent’s W-2 earnings will not prevent you from claiming a deduction on your taxes for the amount you paid for necessary medical expenses on behalf of your parent. A taxpayer’s medical expenses include expenses paid for a person who meets the §152 definition of a dependent. However, §213(a) expands the definition to also include:
a dependent child who filed a joint return with a spouse,
a relative who would have qualified except for exceeding the income level
anyone who would have qualified as the taxpayer’s dependent but was claimed as a dependent on another person’s return.
Medical expenses paid for a dependent claimed under a multiple support agreement are also deductible [Reg. §1.213-1(a)(3)].
John R. Dundon, EA – 720-234-1177 – firstname.lastname@example.org – http://prep.1040.com/jd/ – Enrolled with the United States Department of Treasury to Practice before the IRS – Enrolled Agent # 85353. Under contract with the IRS as a Certified Individual Taxpayer Identification Number (ITIN) Acceptance Agent – I am a Federally Authorized Tax Practitioner (USC 31 Section 330 + IRC 7525a.3.A) regulated under US Treasury Cir. 230.