Q: May a taxpayer deduct legal fees and other business expenses even though the business no longer exists?

A: Yes. A taxpayer may deduct expenses related to a former trade or business if the expenses are directly connected with the former business. A cash-basis taxpayer may deduct expenses in the year paid, even if the trade or business to which the expenses relate was discontinued in a prior year.

Q: If an Employee went on two business trips during the year, but neglected to seek reimbursement from his employer, may he deduct the expenses on his return?

A: No. Reimbursable expenses incurred by an employee for which the employee does not seek reimbursement are not necessary business expenses, and therefore are not deductible. The expenses are nondeductible even if the employee is reimbursed in a later year.

Q: If a taxpayer’s mother paid the interest on a business loan for the taxpayer, may the taxpayer deduct the interest?

A: Yes. If a third party pays interest for the taxpayer, and the payment is intended to be a gift, the taxpayer may deduct the interest (assuming the interest is otherwise deductible). However, if an interest payment is made by a third party for business reasons or purposes other than to make a gift to the person liable on the indebtedness, the payment is not deductible by the obligor unless he or she has given some consideration in exchange for the payment, or a right to reimbursement, setoff or indemnification against the taxpayer is available to the payer.

Q: The deduction for foreign moves is different from that allowed for domestic moves in that certain additional storage fees are deductible. Will a taxpayer’s move from a foreign country to the United States qualify as a foreign move?

A: No. A foreign move can be a move from the United States to a foreign country, a move from one foreign country to another, or a move within a foreign country. It does not include a move from a foreign country to the United States.

Q: Taxpayer is a resident alien, but his wife is a nonresident. He otherwise meets the requirements for filing status of head of household (he is not a surviving spouse, and he maintains as his home a household that is also the principal place of abode for more than one-half of the tax year for one of more qualifying individuals). Does his marriage to a nonresident alien disqualify him from filing as head of household?

A: No. A taxpayer married to a nonresident alien is treated as though he is unmarried for tax purposes. Therefore, he can file as head of household if he otherwise qualifies.

Q: An employer has transferred a taxpayer to a different state. Can the taxpayer deduct house-hunting expenses as deductible moving expenses?

A: No. House-hunting expenses were a category for deductible moving expenses prior to 1994, but are not so today.

Q: May the business standard mileage rate be used to compute deductible expenses of taxicabs or limousines?

A: No. The business standard mileage rate may not be used to compute deductible expenses of vehicles used for hire, such as taxicabs or limousines.

Q: Does the penalty for failure to pay tax apply to failure to pay estimated taxes?

A: No. Although the penalty for failure to pay tax applies to most taxes (including income, estate, gift, employment and most excise taxes), it does not apply to a failure to pay estimated tax.

Q: Taxpayer wishes to withdraw funds from his IRA to pay for the educational expenses of his grandson. May he make such a withdrawal without being subject to penalty, even though his IRA is not an education IRA?

A: Yes. A taxpayer may make a withdrawal from an IRA to pay qualified higher education expenses without being subject to the 10 % penalty tax that generally applies to withdrawals before retirement. Qualified higher education expenses include expenses furnished to the taxpayer, his spouse, or a child or grandchild or the taxpayer or his spouse at an eligible educational institution. (This should not be confused with the rules on education IRAs, in which withdrawals avoid tax to the extent they are used to pay higher education expenses.)

Q: If a taxpayer makes an offer-in-compromise which the IRS accepts, will taxpayer be liable for interest or penalties in addition to the amount agreed to in the compromise offer?

A: No. A compromise agreement relates to the entire liability of the taxpayer, including taxes, ad valorem penalties (such as delinquency, negligence or fraud), and interest for the year or periods concerning which the offer-in-compromise is submitted and is deemed to settle conclusively all questions of that liability. Thus, a compromise agreement covering any part of the tax liability is generally deemed to settle and close all parts of the tax liability.

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