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November 02, 2015 | Written by: Jonathan Crosby, EA
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The file arrived on my desk on January 27, 2015. It was a correspondence audit out of Philadelphia, and it concerned the member’s Schedule C business expenses. On first review I wasn’t feeling overly optimistic about our chances of success. The reason was that the member had reported travel expenses in the amount of $2,163 and an expense of $18,900 that was described as “One MBA.” There was no income or any additional expenses reported on the business schedule. Knowing that educational expenses incurred to qualify for a new trade or business are not deductible ─ and that the IRS for the most part denies MBA expenses ─ I wondered how I was going to approach this case with the member and the examiner.

After consulting with the member and discussing with him the Federal tax regulations contained in Sec. 1.162-5 Internal Revenue Code, Expenses for Education, he agreed that his situation did not fit the definition and qualifications for deducting MBA expenses. He was ready to concede, while I felt that his case was worth fighting for. The member’s initial intention in obtaining his MBA was in fact for maintaining and improving his skills in order to enhance the business that he was running, which would make the expense deductible. I decided that the strategy would be to move forward under the assumption that the taxpayer did qualify for the deduction under Sec. 1.162-5, and as along we could validate the expense we would have a good shot at winning it.

I began by having the taxpayer recreate his travel expenses, which were all incurred for the purpose of his education. I also asked him to furnish proof of payment for tuition expenses.

The response was submitted on February 04, 2015, to IRS Exam, and on March 23, 2015, I received the coveted Letter 3581 that said, “We are pleased to tell you we did not make any changes to the tax reported on your return.” The taxpayer was extremely grateful, as he was facing had we lost a tax liability of $7,403 plus penalties and interest. I was thrilled that I had won another difficult case.

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