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Are Criminal Defense Attorney Fees Tax Deductible?

Whether you are facing criminal charges as an individual or as a business, you may want to know if the legal fees you pay to your defense attorney can be included in your tax deductions. This information is important because the cost of hiring an experienced criminal defense attorney can be quite high.

Even as you mull over when to hire a criminal defense attorney and what makes a good criminal defense attorney, you also need to know how much their services will cost and whether you can include their fees as deductions when you file your taxes.

Can You Offset Legal Fees on Your Tax Return?

Dealing with a criminal lawsuit can be an expensive affair, especially if it involves serious charges that require you to hire a team of experienced criminal defense attorneys. The more experienced your attorneys are, the more expensive they’ll be.

Anyone in this situation will wonder if there’s any way to mitigate the financial burden of a criminal case. One temptation is to try to include the legal services of your criminal defense attorney in South Carolina in your tax deductions. 

There is an interesting debate about the ability of taxpayers to include legal fees related to criminal cases in their tax deductions. This debate revolves around several critical issues, including: 

  • The outcome of the defense
  • The type of charges involved
  • Whether the legal fees are incurred by an organization or an individual

The ability to determine if criminal defense attorney fees are tax deductible lies in the explanation of these three issues. Nevertheless, it’s important to note that some can be capitalized (see INDOPCO, Inc. v. Commissioner, 503 U.S. 79 case of 1992) but not all legal fees are deductible.

Examples of How Taxes Factored in Other Cases

Another notable issue about the inclusion of legal fees in tax deductions is if the legal fees are incurred from proceedings involving a personal matter. For instance, if you’re the CEO of a company and are involved in an assault case, you can’t include the attorney’s fees incurred from the case in your company’s tax deductions. However, the deductibility of attorney’s fees isn’t in question when the amount is paid by persons or entities in organized crime and they can prove a link between the crime and their business.

A good example of this is the John DiFronzo v. Commissioner, T.C. Memo 1998-41. This decision says that if you belong to an organization involved in organized crimes and you’re convicted of a crime that involves defending against fraud or conspiracy charges, you can include the legal fees incurred in your tax deductions.

DiFronzo, who was convicted of illegal profit-seeking schemes like mail fraud, went to the U.S. tax court accusing the Internal Revenue Service (IRS) of thwarting his efforts to include the legal fees he incurred in the fraud case in his tax deductions.

The court ruled that DiFronzo had the right to include these legal expenses in his deductions as legitimate business expenses insofar as he could substantiate the expenses. According to the ruling, DiFronzo could potentially deduct up to $50,000 of his legal expenditure.

In Conclusion

The DiFronzo case adds to the long debate about the ability of convicted criminals to file tax deductions using the legal expenses they incur in their criminal cases. Today, it is still possible to include criminal defense attorney’s fees in your tax deductions if you can prove that you were in business when committing the crime.

If you’re unable to establish a direct business connection between your crime and your organization, it will be very difficult to convince the IRS to allow you to include the expenses you incurred in your tax deductions.

Lastly, the fact that you’ve been convicted of a crime doesn’t deny you the opportunity to include the legal expenses incurred in your tax deductions. However, you can’t include illegal expenses like illicit payments and kickbacks. 

If you have any questions or concerns about these issues–or any others related to your circumstances–call Strom Law today to get the advice you need!



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