Documenting Catastrophic Medical Expenses

_I_ don't see any point to providing documentation with the return, which would almost certainly be ignored. (As an aside, our (my wife and I) medical expenses have exceeded $30,000 as far back as I can remember.)

-- Arthur L. Rubin, CRTP, AFSP, Brea, CA

I have rarely seen large medical expenses lead to an audit, since they are usually easy to document. In other words, if your expenses exceed 10% of AGI, the resulting deduction is usually not that large. If it is large after the 10% haircut, either you've truly had serious medical problems or you're attempting a massive fraud. If the former, you'll have the necessary documentation if questioned. If the latter, I hope you're caught.

Ira Smilovitz, EA

There doesn't seem to be much point in sending documentation with the tax return - it appears to be ignored. You probably can't avoid having some level of audit but that isn't that big of a deal. Before filing, get the supporting documentation organized and make sure it matches the tax return. When the IRS asks for justification for the deduction, promptly send them the five pounds of paper that includes copies of bills & receipts along with a spreadsheet printout summarizing the results. If you look like you are organized and legitimate, they will probably close the audit quickly and you won't hear from them again.

I wouldn't include anything with the tax return that's not a required schedule or form. The way they are processed today they move almost immediately from the service center to the Federal Records Center. The people that input tax return into the IRS data bank don't have time to read the attached data and don't care, because it's not their job to do anything with it.

Once into the IRS computers most returns are selected by computer scenarios and they don't consider the attached data because it wasn't entered into the computer.

While some returns are actually pulled and looked at, that's becoming more rare. Also, in the limited time they have to look at it, they're not going to do a "pre-audit." Save your attachments in the event the IRS decides to audit. There's a much greater chance you will be able to find them if you have them instead of sending them to the IRS.

2) Personal living expenses. Unless the injuries were such that required full-year hospitalization, as the expense exceeds income, you may need to show that your personal expenses were low and/or covered by prior year income or savings, a loan or gift from family or friends, non-taxable income, or that you're going into debt. Since you're claiming that you covered (i.e. paid) your share of the medical expense by taking the deduction, you need to show that you also had the means to survive otherwise too.

I don't understand this point at all. A 10 day stay in a major hospital emergency room now runs about $200K if you don't have insurance. Running up a $30K/year bill is nothing in the modern medical system.

I don't understand the requirement to show you had the means to survive otherwise? Is there a code section that corresponds to that?

You calculate your AGI the way you normally calculate your AGI. In the above example it is $30K. That calculation doesn't change based on having means to survive?

The medical expense is calculated using invoice and receipts. If the expense is more than 10% of the AGI, you may have a Schedule A deduction.

I don't understand this point at all. A 10 day stay in a major hospital emergency room now runs about $200K if you don't have insurance. Running up a $30K/year bill is nothing in the modern medical system.

I don't understand the requirement to show you had the means to survive otherwise? Is there a code section that corresponds to that?

You calculate your AGI the way you normally calculate your AGI. In the above example it is $30K. That calculation doesn't change based on having means to survive?

The medical expense is calculated using invoice and receipts. If the expense is more than 10% of the AGI, you may have a Schedule A deduction.

===========Yes, but you claimed you are taking the deduction, which means you actually PAID the bill, and have an expense that exceeds your income. Therefore, you need to explain what you lived off of -- else the IRS may impute you have unreported income that you used to pay your personal expenses and thus increase your tax by the necessary amount. See sections 61 and 7601.

It's not a code section. It's the presumption that the large amount of money going out must have come from somewhere, and the taxpayer may have to prove it isn't income.

-- Arthur Rubin, CRTP, AFSP, Brea, CA