December 01, 2014 | Written by: Jonathan Crosby, EA
I received a new case in July. It was your typical Letter 566 exam questioning the member’s Employee Business Expenses. I did a quick review of the return and learned that the member had reported ten W2’s for income of $5,338, which seemed quite low compared to the $20,098 that he’d reported as unreimbursed employee expenses on his Form 2106. I knew this was going to be an interesting story.
During the initial call I discovered that the member was retired and trying to break into acting. He explained how he had to go to all these auditions, 21,635 vehicle miles worth, while also incurring additional expenses such as office supplies, pictures, dues etc. He also told me that most of the expenses listed on the return were estimated, and there were no receipts. Any receipts that he did have had been lost in a flood. As we discussed his ten various acting jobs, some of which didn’t pay more than $46, I began to formulate a strategy. Based on the member’s income level, I knew he wouldn’t qualify for the “starving artist deduction,” which allows for an above the line deduction for “certain business expenses of performing artists." In fact, these expenses were not actually unreimbursed employee expenses associated with any of the ten various employers, but rather job search expenses associated with the procurement of those 10 acting gigs.
I immediately got the member to start recreating his mileage log, obtaining third party verification, and digging up any receipts he could find to validate some of his expenses. I also asked him to put together a statement attesting to the loss of records with any specifics he could provide about the flood. Weekly phone calls to keep up the momentum finally paid off when on September 15, 2014, I was able to send out the response, and then again on November 10, 2014, when the IRS sent the letter 3581 announcing that they did not make any changes to the tax reported on the original return. We won the case, and the member was thrilled.
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