The old adage stating that if something is too good to be true, it probably is too good to be true really applies today. We have seen the headlines about the losses incurred by the people who invested with Bernie Madoff. Many of those people were millionaires, with “were” being the operative word of the day. It was too good to be true.
However, there are other schemes out there promising bigger refunds on tax returns that regular taxpayers, like you and me, are filing. These larger refunds are the result of converting certain personal expenses into business expenses. Personal expenses, with few exceptions, are not deductible on a tax return, while business expenses are normally deductible.
What schemes are promoters using to get people to believe they can deduct personal items as business deductions? Much of it seems to start with the Internet. Promoters are promising big earnings and big deductions to individuals who start online retail businesses, offer online services, or run online auctions. The big earnings may or may not materialize to the taxpayer. More often than not, the promoter makes money on the setting up of the operation, and you can bet he is getting paid up front.
Some of the promise of big deductions comes from operating the “business” out of the taxpayer’s house. It is true that if a taxpayer is operating a bona fide business out of his/her home, the deduction for office-in-home is very legitimate. The legitimate taxpayer has an office set aside that is used regularly and exclusively for business. He may or may not see clients in the office, but the office is where the taxpayer makes his business connections. It is usually a separate room or rooms in the house. It’s the real thing. But the promoters of schemes tell their victims that by putting a file cabinet or computer or desk in each room, the taxpayer can deduct darned near all of the expenses of running the entire house. Nothing could be farther from the truth.
A normal office-in-home deduction is determined by measuring the square footage of the office and measuring the square footage of the entire house and calculating the percentage of the office. This percentage is then applied to the expenses of the house, such as gas, electric, trash, mortgage interest, property tax, home insurance, and home repairs and maintenance. In addition, a percentage of the home’s cost is taken as a deduction. This can all result in a very nice deduction. If the business being operated out of the home is a legitimate business, it can save a good amount of tax.
The rub comes into play when the business operated out of the home is not a legitimate business or when the definition of “office” is greatly expanded. The Internal Revenue Service, in these instances, calls these “home-based business tax avoidance schemes.” These schemes are just another way to play on the wants and desires of all taxpayers to pay less in taxes.
By the way, paying less in taxes is a legitimate desire. We are not required by any law to pay more than our fair share of taxes. We are all, however, required by a huge body of law to pay our fair share of taxes. For good or bad, the 16th Amendment to the Constitution gave Congress the power to lay and collect taxes. If those good people back then only had a small inkling of what power they were giving Congress, they might not have passed the 16th Amendment! Taxpayers, promoters of schemes, and tax preparers go to jail everyday because they are trying to pay less than their fair share.
The IRS’ Criminal Investigation Division considers itself an equal opportunity keeper of the law. Everyone is fair game if they want to cheat. They keep especially good statistics on the number of return preparers that are investigated and eventually convicted of crimes, and they make sure all return preparers see those statistics. In 2008, they investigated 214 preparers for potential improprieties. In the end, 124 of those 214 were convicted of cheating and sentenced to an average of 18 months in prison. That is serious business. When you think about it, if everyone would pay their fair share, our deficit would probably only be three trillion dollars instead of four trillion dollars!
This is Jerry Coon signing off.
Jerry Coon is an Enrolled Agent.
He owns Action Tax Service on Northland Dr in Rockford.
His email address is firstname.lastname@example.org