I'm sure that there were deductions he took, that if audited, might have been disallowed. But as ds01123 says, all you do is pay the difference and move on. Dad was willing to do that as a tax strategy to limit his tax liability as much as possible.
Originally Posted by charlestudor2005
There is, of course, a huge difference between: (a) knowingly claiming invalid deductions and (b) claiming deductions in a gray area, where even with full knowledge of all the facts it's not completely clear whether the deduction is valid. There's nothing wrong with (b), which is what it sounds like your father did.
But it may have other consequences. When dealing in gray areas, recognize that there are different
shades of gray. Some items, even if disallowed, might only result in your having to pay the additional tax
plus interest. Others might result in a
penalty on top of the additional tax. The Code and Regulations establish a variety of different standards of how likely (based on existing law, IRS pronouncements, etc.) it was that the tax position was correct: nonfrivolous, reasonable basis, realistic possibility of success, substantial authority, more likely than not, etc. Depending on how strong/justified your position was, combined with other factors such as whether it was adequately disclosed and whether it meets the definition of a tax shelter, either the taxpayer or the tax return preparer may face various penalties or sanctions. (In some instances, the taxpayer may be able to satisfy the standard by showing that he/she relied on the tax return preparer or another tax advisor. But the IRS and courts are getting much tougher on whether the taxpayer should be able to rely on that tax advice. And when they're considering a penalty, they've already decided that the tax position was invalid and they're looking at penalties with hindsight.)
Some of the items mentioned above would almost certainly result in penalties if audited, even though a CPA told you it was OK.
) my costumes, lingerie, supplies, travel expenses, lodgings, advertising, etc. I also pay for private health insurance, have a savings plan - all the things "normal" folk do when independently employed. 
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