Identification

• Normally, you cannot deduct criminal attorney fees because the IRS considers this a personal expense in most cases, according to Lawyers.com. Also, the IRS often defends its refusal to allow taxpayers to deduct criminal charges under the guise that they are not a necessary expense. For example, fighting drunk-driving charges is not a standard-of-living cost because it does not involve your job.
  
  

History

• The Supreme Court settled the issue of whether a taxpayer can deduct legal fees in the 1966 case "Tellier v. Commissioner of Internal Revenue." In this case, the IRS argued that the federal government should use the tax code as public policy to stop deductible criminal legal fees. However, the Supreme Court ruled that the IRS must allow a deduction of fees when it has an impact on a person's federal taxes, because it is not proper for the IRS to use tax code to implement public policy.
  
  

Deductible Criminal Legal Fees

• If you want to deduct criminal legal fees, you must prove they are "ordinary and necessary" for your business, according to Jeremy Temkin of the New York Law Journal. The dividing line between business and personal causes sometimes falls in a gray area. For example, the head of a major bank tried to deduct legal fees incurred after his criminal case for embezzlement from the company and fraud due to falsifying company records. The judge disallowed deducting legal fees related to embezzlement charges because he was just stealing from his employer, but allowed the defendant to deduct fees related to falsifying records, because his superiors required him to do this. The judge acknowledged that following orders from a superior is a job requirement, so he found that the expenses were deductible.
  
  

Tip

• If you want to determine whether or not you can deduct your legal fees, ask your attorney and have him itemize which labor hours went to tax-deductible work. You may need advice from a tax professional, too. Some cases depend on whether you receive taxable damages. In personal lawsuits, for example, you cannot deduct legal fees unless you win taxable punitive damages.