Q:

Subject: Audit Question

Dear Tax Guru,

My husband is being audited for his 2003 return. He finished his MBA in May 2003, began working in September 2003 and deducted his last semester of tuition fees when he filed his return. Apparently a tax expert gave a seminar in school explaining why MBA students can make this deduction, but maybe he was mistaken. Anyway, my husband is not working in the same field or for the same company that he left when he took time off to go for his MBA. Do you think there is any justification he can use for claiming this deduction?

Thanks in advance for your help,

A:

It sounds as if your husband misinterpreted the rules for deducting education costs.  As long as I've been in the tax business (over 30 years), this has been one of the craziest Catch 22 type rules.  Basically, you are only allowed to deduct education costs related to the profession you are already in.  Education costs incurred to enter new professions have never been deductible. 

I've always thought this law to be counter-productive in regard to the country's work-force, which should be encouraged to learn the skills necessary to adapt to the changing business environment, such as factory workers learning how to use computers.  Unfortunately, the words "Logic" and "Congress" are as incompatible as any two words could be.

It doesn't look good for your husband in regard to salvaging this deduction.  He will owe the extra tax plus interest.  However, the penalties that auditors routinely toss in are completely negotiable and can be waived if your husband can convince the auditor that this was an accidental misinterpretation of the law.  If he hasn't already done so, he should also make sure he has deducted all of his job hunting costs.

Another lesson that you both should take from this is the wisdom of using a professional tax preparer instead of trying to interpret the laws and regulations on your own. 

Good luck.

Kerry Kerstetter

Update:

Employee Could Deduct Cost of MBA That Helped Him Move Ahead in Company

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 9/01/2005 03:04:00 PM Send this post: