Take It All Off … Take 2

by Quest Staff on January 1, 2005 - 4:18pm

After reading about income tax deductions for people with disabilities, Timm Aguirre rejoiced. The Phoenix man, who uses a power wheelchair because of Becker muscular dystrophy, always thought there had to be tax breaks out there.

“Being disabled is a very expensive venture,” Aguirre said. “I wanted to make it as cost-effective as possible. But I could never get anyone or any company to buy into my ideas.” For years, Aguirre deducted only obvious medical expenses, like insurance premiums and health care costs.

But after learning about the little-known and potentially valuable Internal Revenue Service (IRS) category of “impairment-related work expenses” (IRWE) and the wide variety of possible medical deductions, Aguirre began searching for someone to help him make his claim.

Perseverance paid off. Aguirre, who works in cable television sales, found Phoenix accountant Ted Raffel, who had never filed a claim for IRWEs but was willing to give it a try.

Aguirre organized his tax records and receipts and, nearly nine months after filing his 2003 tax return and amended returns for 2000 through 2002, received state and federal refund checks for more than $15,000. These refunds represented both impairment-related business expenses and medical expenses.

What’s an IRWE?

IRWEs constitute a vague, gray area in the U.S. tax code. Not only are there no clear definitions of qualifying expenses, but taxpayers looking to the IRS for help often get conflicting responses.

The bottom line appears to be: Can you make a case that the deducted item is essential to keep you working?

To qualify for IRWEs, a person must be employed and have a disability “that substantially limits one or more of your major life activities, such as performing manual tasks, walking, speaking, breathing, learning or working.”

Deductible IRWEs are those “ordinary and necessary business expenses” that are:

  • necessary for you to do your job
  • goods and services not used, other than incidentally, in your personal activities
  • not specifically covered under other income tax laws

IRWE deductions are worth more to taxpayers than medical deductions because every penny is deductible, while medical expenses must exceed 7.5 percent of your adjusted gross income before they can be deducted. In addition, unlike standard business expenses, IRWEs aren’t capped at 2 percent of your adjusted gross income.

“While you can’t double dip and deduct items under both medical expenses and impairment-related work expenses, people should take the best tax advantage,” advised an IRS media representative, who declined to be identified by name.

Because of the vague definition of IRWEs, the IRS spokesman acknowledged, there’s no “laundry list” of acceptable deductions. The key, he emphasized, is that expenses must be “ordinary and necessary.” IRS decisions are based on the facts and circumstances of individual taxpayers, he said.

In other words, if you can prove you need it to work, and it’s not covered anywhere else in the tax code, you have a good shot at winning an argument with the IRS.

In order to meet the tax code’s “burden of proof,” Raffel, owner of Raffel Financial Services in Phoenix, uses these four guidelines for IRWEs:

  • Due to your disability, did you have to buy something in order to work that your nondisabled neighbor didn’t have to buy?
  • Did you have no choice in thematter: Were no other solutions possible, and would you be unable to work without the product or service?
  • Did the expense come out of your pocket, and was it not reimbursed?
  • Is the expense reasonable?

“Yes” answers mean the expense probably is deductible as an IRWE, Raffel said. “It’s a shame that a lot of people with disabilities are qualified to make these kinds of deductions, but they aren’t even aware of it.”

Differing advice

Impairment-related work expenses must be connected to your job, but they don’t necessarily have to be incurred solely in the workplace. “The whole area is a bit murky,” Raffel said. “Sometimes, people who contact the IRS via its customer service line receive a mixed set of opinions.”

Transportation and attendant care are two examples of this situation.

The IRS media representative told Quest that the expense of hiring an accessible van service to commute to work wouldn’t necessarily qualify for any kind of tax benefit.

But four calls to the IRS toll-free information line (800-829-1040) yielded the unanimous opinion that a van service does qualify as an IRWE. IRS operators said that people can’t fulfill their job responsibilities if they have no way of getting to work, thereby making the expense both disability-related and work-related.

A similar discrepancy occurred over deducting the cost of a personal care assistant to help you get ready for work at your home.

The IRS representative said, “I am unaware that is allowable” because every working person has to get ready for work.

Nevertheless, three of four IRS information line operators advised Quest that this would qualify as an IRWE; the fourth said it would qualify as a medical expense.

Because of differing opinions and vague language, it pays to build your own case, showing that the expenses are essential to keeping you working. Steve Mendelsohn, a New York attorney who does public policy research and advocacy on behalf of people with disabilities, offers this example as a guideline:

If, because of your disability, you must buy special computer software to work, and that software requires the purchase of a more powerful computer to run it, then both the software and the computer are deductible as IRWEs. But if you also use the computer as a disability aid off the job, then only the software would be an IRWE and the computer would be a medical expense.

Timm Aguirre, a senior sales consultant for Cox Communications (a cable company) in Phoenix, deducted his high-definition television and a custom-designed lightweight laptop computer that he can carry on his wheelchair.

“This is not to be greedy in any way, but things like a TV and a computer are services that I use every day,” Aguirre said. “I sell cable, Internet and phone service, so I need a TV and computer in order to be employed.”

The two R’s

The best advice on determining IRWE and medical deductions is twofold — research and responsibility.

Research: Gather all necessary documents and receipts before you file the tax return. Don’t wait until the last minute to file. Contact multiple IRS customer service representatives and write down the identification number of each representative to whom you speak, as well as the date, time and advice.

First among your documents should be a doctor’s statement confirming your disability. Second are receipts for eligible expenses. Third, do your homework before visiting a tax preparer and devise an expense worksheet summarizing both impairment-related work expenses and medical expenses. (For information on IRWEs and an expanded list of eligible medical expenses, see IRS Publication 502, Medical and Dental Expenses.)

Responsibility: Be ready to show how an IRWE is necessary. The IRS acknowledges that individual interpretations can arise from reading different IRS publications or speaking to representatives.

“Yes, this is an ongoing issue, but it’s an issue where the taxpayer has to be reasonable and prudent about the tax code, and the IRS has to be reasonable with its application of the tax code,” the IRS media representative said.

Above all, Raffel said, be sure your deductions aren’t part of an attempt to gain a refund under false pretenses.

Finding help

Don’t assume professional tax preparers are aware of all deductions available to the taxpayer with a disability.

“There really is a lack of awareness on this subject,” Raffel said. “The few clients I have worked with in this area explained that they encountered other tax preparers who were not familiar with the information on impairment-related work expenses.”

It’s possible to file your own return without the aid of a tax preparer.

If you’re self-employed, deduct the business expenses on the appropriate form (Schedule C, C-EZ or F) used to report your business income and expenses.

If you’re an employee, complete Form 2106, Employee Business Expenses, or Form 2106-EZ, Unreimbursed Employee Business Expenses. Enter on Schedule A (Form 1040), line 27, that part of the amount on Form 2106, line 10, or Form 2106-EZ, line 6, that’s related to your impairment. Enter the amount that’s unrelated to your impairment on Schedule A, line 20.

If you missed taking deductions in previous years, you can file an amended tax return for up to three years after the purchase of an IRWE, using IRS Form 1040X.

What if you’re challenged?

If the IRS disallows certain deductions, taxpayers could be subject to penalties, in addition to having to pay unpaid taxes and interest. Penalties are determined on a case-by-case basis.

Maintain thorough and accurate records, research the tax code and IRS publications, make specific references to the tax code, and keep a log of all calls or e-mails to the IRS customer service center. If a deduction is disallowed, these actions can help you avoid a penalty by showing you acted in good faith.

In the face of an audit or appeals process, the best defense is a good offense: Be ready to show how the deduction facilitates your ability to work, making it an ordinary, necessary and reasonable expense for an employed person with a disability.

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