The IRS lost a Tax Court case on Tuesday involving the IRS disallowing a deduction for more than $49,000 in medical expenses paid to caregivers of  a deceased 92-year-old woman who had been suffering from dementia.  The woman, Lillian Baral, died in August of 2008.  The IRS audit involved her 2007 tax return.

The problems started when no tax return was filed for Ms. Baral for 2007.  When the IRS came after her estate regarding this unfiled return, her brother (the administrator of her estate) tried to claim $49,580 in medical expenses paid to two unlicensed caregivers as deductions on her 2007 return.  The caregivers provided 24/7 care to Ms. Baral.  Ms. Baral’s doctor had determined in late 2006 that she needed round-the-clock medical care due to physical impairments related to dementia.

The IRS disallowed the deduction on several grounds.  They argued that “expenses incurred which are merely beneficial to the general health of an individual are not deductible,” and that “the salary and cost of room and board for housekeepers hired on the advice of a doctor are not deductible medical expenses.”  The IRS also stated that Ms. Baral’s estate had not established that her functions were impaired in 2007 or that the services of the caregivers were provided “pursuant to a plan established by a qualified health care professional.”

The Tax Court ruled in favor of Ms. Baral and allowed the deduction.  The Court agreed with the IRS that the amounts paid to the caregivers were “not for the diagnosis, cure, mitigation, treatment or prevention” of disease, which is one of the requirements for taking a medical expense deduction.  But the Court also ruled that “amounts paid to caregivers are deductible if their services are qualified long-term care services” as defined in the Internal Revenue Code:

“Qualified long-term care services” means necessary diagnostic, preventative, therapeutic, curing, treating, mitigating, and rehabilitative services and maintenance or personal care services required by a chronically ill individual and provided pursuant to a plan of care prescribed by a licensed health care practitioner.

An important takeaway from this case is to have documentation from a doctor that certifies the need for the care, in case the IRS ever challenges the deduction.

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