Did you hear the one about the pot dealer's tax return? The New Yorker who claimed the whole city as a dependent? The exotic dancer who deducted ... well ... you know?
It's time once again for Bankrate's 10 craziest tax write-offs, presented as a shot of levity to help make filing your annual federal income tax return a little less taxing.
Of course, it is no laughing matter to try to knowingly defraud Uncle Sam. Serious consequences await those who fail to file, falsely file, knowingly underreport or otherwise play fast and loose with their returns
"In my business, as the saying goes, 'Pigs get fed, hogs get slaughtered.' If you want to deduct something, just don't be overly aggressive with it. It's everything in moderation," advises Walt Hatter, a CPA at Hatter & Associates in Fort Worth.
Steer clear of these crazy tax tactics:
1. It went up in smoke. Mr. Hatter must have thought he was hallucinating when one of his clients, a criminal defense attorney, referred a marijuana dealer he was defending to him. The dealer was facing prison time for drug dealing and didn't want to be nailed for tax fraud as well.
"Because he was involved in an illegal business, he could not take any deductions, period," Mr. Hatter says. "The tax code is written where if you are engaged in something illegal, you have to recognize all of the income, and none of the deductions are recognized, even the cost of the product."
Mr. Hatter chuckles at his client's income statement, or lack thereof: "Let's just say he wasn't getting 1099s from his customers. He gave me a number, and we paid taxes on it."
2. No receipts from above. Putting a few bills into the church offering plate got one client of Virginia CPA James T. Campbell in a bind when the IRS asked for canceled checks or receipts to support his charitable deductions. Explaining why he had no such receipts, the taxpayer said he throws in cash "as the spirit moves me."
Mr. Campbell says the IRS agent paused to consider the taxpayer's response, and then offered this advice: "Always take your checkbook to church with you. When you feel the spirit coming on, just take out your checkbook and fill in any amount you think is right. ... This way both the spirit and the IRS will be pleased."
3. Silence is golden ... and deductible. Allyson Baumeister, CPA, of Sanford, Baumeister & Frazier in Fort Worth, recalls one prominent client who found a creative solution to a chronically noisy next door neighbor: He bought the house, ripped it out of the ground and donated it to a local women's shelter. He then claimed the value of the house as a charitable deduction.
4. He took Manhattan, the Bronx and Staten Island, too. When accounting software was in its infancy, a rookie CPA at Hunter Group of Fair Lawn, N.J., prepared a return for an individual with one small glitch: The software mistook the filer's address "New York, N.Y." for the name of a dependent. The mistake went unnoticed until one day the IRS called. The agent apologized that the deduction was being disqualified, even though, as the agent politely agreed, it might indeed be justified.
5. You can write off the pimp hat. When does an entertainment expense exceed IRS criteria? A client of Ed Mendlowitz, CPA with WithumSmith+Brown in Morristown, N.J., wanted to deduct the cost of a call girl he hired to entertain some clients. When Mr. Mendlowitz told the businessman he'd have to present said contractor with a Form 1099 to support this business expense, the client dropped the whole idea.
6. The "Zoolander" deduction. Those who work in front of the camera for a living – like Derek Zoolander in the 2001 film comedy – often ask their accountants to deduct all manner of personal property and perks as business expenses, from full wardrobes to back waxing.
"We have public speakers, and we help them understand that they cannot deduct all of their clothing, even though they wear it onstage," says Dallas CPA Ken Sibley. "Models can deduct a lot of makeup and certain pieces of apparel, but it has to fit the rules. We don't let them deduct the pedicures, manicures and back waxing."
7. What are you, an Indy driver? New Jersey CPA Elihu Katzman couldn't believe this one: "We had a client-salesman that was asked the number of miles he used his car for business that year. He insisted that he drove 60,000 miles, all for business. We asked him if he had any time to sleep, in that he must have spent most of the day and night driving."
8. The $50,000 business meeting. Imagine Mr. Hatter's surprise when a client-attorney listed $50,000 in entertainment expenses on his return – quite a chunk considering the guy's gross income was about $300,000.
"I said, man, what is that? He said, 'Well, I threw a party for my clients.' And I said, 'You didn't invite me?' Anyway, we started going through it and he said, 'Walt, I've got to tell you, that was for my daughter's wedding. But I did invite all my clients.' "
The lawyer's occupation? Criminal defense attorney.
9. Finally, the Social Security crisis solved. If parents ever start documenting this deduction, we'll no longer need to worry about Social Security. Marcia Geltman, CPA with Nisivoccia & Co. in Randolph, N.J., says parents have asked her more than once if they can claim a bad-debt loss from unpaid loans to their children.
"The correct answer is, unless you have documentation verifying the existence of the loan and have taken legal action that resulted in a determination that the loan is not collectible, no deduction is allowed," she says.
10. Inflating your assets. "The one they always talk about at CPA classes is where the topless dancer got breast implants and wrote them off as a business deduction under Section 179 and treated them as a capital asset, as an ordinary necessary business expense, and was able to deduct them," Mr. Hatter says. "The IRS challenged her, it went to the tax court and she won."
