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Tax return preparation: where are refunded fees deducted?

Bill and Ann are unrelated taxpayers. Both had their taxes prepared last year by the same tax preparer. Bill paid $300 for his tax return preparation while Ann paid $500 for hers. Bill is an employee (receives a Form W-2) while Ann is self-employed (files Form Schedule C). Two years later, as a result of an agreement with state officials, the tax preparer sends Bill a $25 payment and Ann a $75 payment for excessive charges when preparing each of their tax returns.

Where does each taxpayer deduct the tax preparation fees? Is the payment they each receive from the tax preparer taxable to them? Why or why not? Is there any additional information you need for either taxpayer before you can answer this question?

Solution Preview

If I understand the question correctly, the tax preparer was required to rebate a portion of the fees charged in the preparation of prior year tax returns. That, in itself, is a rather unusual circumstance, but I suspect it has nothing to do with Bill or Ann directly. The cause must have been an investigation, and Bill and Ann received some benefit of the investigation.

There are two issues to discuss:
1. The taxability of the funds received
2. The proper ...

Solution Summary

The solution first explains where the original fees for tax prepartion might have been deducted in the personal returns. Then it discusses whether the refund is taxable, and if so, on what form. There are situations where the rebate would not create a taxable event, and the solution discusses those circumstances.