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IRS WARNS TAXPAYERS TO BE AWARE OF
HOME-BASED BUSINESS TAX AVOIDANCE SCHEMES
The Internal Revenue Service issued a consumer alert today
regarding home-based businessschemes that purport to offer tax “relief.” In
reality, they provide bad advice to unwary taxpayers that, if followed,
results in improper tax avoidance.
The promoters of these schemes claim that individual
taxpayers can deduct most, or all, of their personal expenses as business
expenses by setting up a bogus
home-based business . But the tax code firmly establishes that a clear
businesspurpose and profit motive must exist in order to generate and claim
allowable businessexpenses.
As the 2002 filing season begins, IRS advises taxpayers to
think carefully before filing a return that reflects such unallowable
activities. No matter how convincing the claims that are found in marketing
materials for these schemes may appear,
nondeductible personal living expenses cannot be transformed into deductible
businessexpenses.
“Each year, taxpayers reasonably search for deductions
that will reduce the amount they owe,’’ said IRS Commissioner Charles O.
Rossotti. “But they should resist the temptation of quick and easy schemes.
Creating a bogus home businessor other schemes cross the line and puts the
taxpayer on a path that will result in paying interest and penalties on top
of the taxes they owe.”
Some examples of personal expenses that are not deductible
but are commonly claimed as businessexpenses in home-based businesstax
avoidance schemes include:
Deducting all or most of the cost and operation of a
personal residence. For example, placing a calendar, desk, file cabinet,
telephone, or other business -related item in each room does not increase the
amount that can be deducted.
Deducting a portion of the total house payment is not
allowable if the businessis not real. Paying children a salary for
services, such as answering telephones, washing cars or other tasks and then
deducting these costs as a businessexpense is not allowed.
Deducting education expenses from the salary wrongfully
paid to children as employees also is not allowed.
Deducting excessive car and truck expenses when the
vehicle has been used for both
businessand personal use is not allowed.
Deducting personal furniture, home entertainment
equipment, children’s toys, etc. is not allowed.
Deducting personal travel, meals, and entertainment under
the guise that “everyone is a potential client” is not allowed.
Any tax scheme that claims a person can deduct what would
normally be personal expenses should be considered highly suspect. Taxpayers
who claimed such deductions on a past tax return and now wish to file an
amended return, can contact the Internal Revenue Service at 1-800-829-1040.
Taxpayers who have questions on this subject or wish to report
possible schemes can call 1-866-775-7474. They can also contact the IRS by
sending an email to
irs.tax.shelter.hotline@irs.gov.
Additional information on this and related issues can be
found at both
http://www.ustreas.gov/irs/ci and
http://www.irs.gov/prod/ind_info/abuse/index.html The following
publications may also provide assistance on these issues and can be found at
http://www.irs.gov
Publication 587, “Business Use of Your Home.”
Publication 463, “Travel, Entertainment, Gift, and Car Expenses.”
Publication 334, “Tax Guide for Small Business.”
Publication 17, “Your Federal Income Tax for Individuals.”
