IRS Issues New Warning on Claiming Expenses: "Taxpayers Should Be Careful"

Ahead of tax season every year, many of us seek out ways to reduce our taxable income. One popular way to do so is by setting up a flexible spending account (FSA) or health savings account (HSA), which can help you pay for a variety of medical expenses. Both allow you to allocate pre-tax dollars for these expenses, which then don't affect your adjusted gross income (AGI) when you file your return. But while health savings accounts have become popular options for funding health-related products and procedures, the Internal Revenue Service (IRS) recently issued a new warning about claiming certain things as medical expenses.

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The IRS outlines which medical expenses are "includible" in Publication 502, listing items and services such as breast pumps and supplies, birth control pills, eyeglasses, long-term care, and therapy. However, in a March 6 press release, the agency warned that some taxpayers are "being misled" by companies telling them that food and wellness expenses can be paid or reimbursed under health spending plans including FSAs, HSAs, health reimbursement arrangements (HRAs), and medical savings accounts (MSAs).

"Legitimate medical expenses have an important place in the tax law that allows for reimbursements," IRS Commissioner Danny Werfel said in the press release. "But taxpayers should be careful to follow the rules amid some aggressive marketing that suggests personal expenditures on things like food for weight loss qualify for reimbursement when they don't qualify as medical expenses."

According to the IRS, some companies are telling taxpayers a doctor's note will suffice as documentation for expenses like gym memberships, fitness trackers, and dietary supplements. However, the IRS says that even if a doctor writes a note based on a patient's self-reported health information, that doesn't automatically legitimize the purchase as a medical expense, which must be a "diagnosis-specific activity or treatment."

Sound confusing? The agency attempted to break it down, using an example of a patient with diabetes trying to control his blood sugar by eating a low-carb diet. In the example, the patient gets an ad telling him a doctor will write a note, for a fee, explaining that he purchased the low-carb food in his attempt to eat healthier. The company tells him he can then submit the note to his FSA to be reimbursed for the cost.

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But the IRS says this is the type of claim that will be denied, as food isn't a medical expense "and plan administrators are wary of claims that could invalidate their plans." In fact, a spokesperson told The Washington Post that food and dietary supplements are "rarely" deemed a medical expense.

The IRS told WaPo that there's also an issue with a lack of face-to-face interaction when securing these letters. For example, when patients use Truemed, a company that helps people with HSAs get letters of medical necessity for these purchases, patients fill out an online form and a remote doctor reviews their submission.

But while the IRS might not like this, Calley Means, co-founder of Truemed, told WaPo that the agency is actively making it harder for patients to get "medically tailored exercise and food plans" than it is for them to get antidepressants or weight loss drugs.

"Let's call this what it is: an attempt by regulators to confuse and freeze the trend of Americans learning that they can work with their doctors to reverse disease with food, not drugs," Means told WaPo.

Means also highlighted cases where foods and diets have been ruled as medical expenses for those with certain medical conditions, noting that the IRS' stance also seemingly contradicts the "Food Is Medicine" program launched by the federal government's Office of Disease Prevention and Health Promotion last year.

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