Tax-audit response might not be worth it

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The federal tax code can be murky when it comes to what qualifies as medical and business deductions, and that can lead to you being audited.

However, even tax professionals get it wrong, and you might end up owing interest and penalties on tax deductions to which you thought that you were entitled. (Some tax preparers sell audit insurance, but many of those policies cover audit representation, not the taxes and penalties.) But a private-letter ruling, which makes precedent-setting determinations on specific cases, is a way to handle an audit. It typically costs $1,000 to $5,000, because you need a tax lawyer to draft the letter and apply to Internal Revenue Service for the ruling. Unless your deduction reaches six figures, a private-letter ruling likely isn’t a cost-effective approach.

In smaller matters where, say, hundreds or a few thousand dollars are involved, you simply can ask for the negligence penalty to be dismissed if you can show that you used a professional tax preparer.