Abusive Home-Based Business Tax Schemes

1. Introduction
2. Background
3. Misuse of the Law
4. Questions and Answers

Introduction

The IRS is providing information about abusive Home-Based Business schemes to help taxpayers avoid the pitfalls of these schemes:

• These schemes are abusive because they manipulate and misinterpret tax laws.
• The public should not be fooled by home-based business schemes that claim taxpayers can deduct most, or all, of their personal expenses as business expenses.
• Taxpayers should be wary of promoters who claim otherwise.
• The IRS and other federal agencies are aggressively pursuing and successfully prosecuting promoters of schemes and scams, including abusive home-based business schemes.
• Participating in these schemes can result in repayment of taxes owed with interest and penalties, and possibly imprisonment and fines.
• Even innocent taxpayers involved in these schemes can face a staggering amount of back interest and penalties.
• Taxpayers involved in one of these schemes should correct any improper tax return filings.

Background

Most taxpayers with small businesses accurately report their income and expenses. However:

• Schemes involving inflated business expenses, deduction of personal expenses and misuse of purported home-based businesses have become prevalent.
• The IRS has become aware of several abusive tax schemes, which involve taxpayers erroneously deducting personal living or family expenses. Examples of these schemes are:
  • Bogus home-based businesses: taxpayers attempt to create the appearance of having a home-based business – where none actually exists – and deduct personal, living or family expenses.
  • Legitimate home-based businesses: taxpayers have a legitimate business operated from their home but erroneously attempt to deduct personal living expenses.
• These schemes have gained popularity due to aggressive marketing by promoters who sell such schemes as a means to reduce taxes.
• These schemes are abusive because they manipulate the interpretation of the tax laws.
• Some promoters market a package, kit or other materials that claim to show taxpayers how they can avoid paying income taxes but the arguments used have no merit.
• Abusive promoters typically advise taxpayers to maintain detailed records of their activities and the expenses they incur; however, detailed records do not convert personal, living or family expenses into deductible business expenses.
• Expenses must be “ordinary and necessary” in relation to a legitimate business activity, and satisfy all other requirements in order to be deductible business expenses on a tax return.
• Taxpayers should beware of claims that are too good to be true and seek independent professional tax advice.

Misuse of the Law

The IRS has uncovered a number of schemes that claim to allow deductions for personal living expenses. Taxpayers should consider these points before investing in a possible abusive scheme:

• Any investment scheme or promotion that claims to allow a federal income tax deduction for normal personal expenses should be considered highly suspect
• A business must truly exist prior to claiming expenses
• In order to be deductible, the expenses must be ordinary and necessary expenses paid or incurred in carrying on a trade or business
• Personal, family and living expenses are not deductible business expenses
• Forming an S corporation, partnership, or any other pass-through entity does not cause personal, living and family expenses to become deductible; nor do incorporation, the existence of board minutes, and partnership agreements authorizing personal, living or family expenses cause these expenses to become deductible

Examples of misuse of the law:

• TRAVEL – Deducting travel, meals, and entertainment under the guise that everyone is a potential client.
• AUTO – Excessive car and truck expenses when the asset has been used for both business and personal use.
• PAYMENTS TO FAMILY MEMBERS – Deducting payments to family members for routine household tasks that are not ordinary and necessary to the operation of the business, such as taking out the trash, mowing the lawn, washing the car, answering the telephone, etc. Also payments to family members that are excessive in relation to the services performed.
• BUSINESS USE OF HOME – Abusive promoters often advise taxpayers to deduct excessive costs associated with the operation of the home. The promoters claim that the “exclusive use” restriction can be avoided by placing business-related items in each room of the house. A deduction for the business use of a home is limited to that area of the home that is used regularly and exclusively for business purposes (Internal Revenue Code Section 280A). For example, merely placing a calendar or file cabinet in a room does not satisfy the “regular and exclusive business use” requirement.
• EDUCATION EXPENSES – Some schemes advise taxpayers that they may claim up to $5,250 per year in educational expenses for each family member. There are specific requirements that preclude virtually all investors in this scheme from qualifying for this deduction (Internal Revenue Code Section 127).
• MEDICAL REIMBURSEMENT PLANS – Abusive promoters assert that taxpayers can make their family’s medical expenses 100 percent deductible merely by employing their family member(s). In order for the medical expenses to be deductible under a self-insured medical reimbursement plan, a bona fide employer-employee relationship must exist. In addition, the plan has to meet other requirements (Treasury Regulation Section 1.105-11).
• RECORD KEEPING – Taxpayers in these schemes are advised to maintain detailed records of all expenses incurred. The existence of such records does not negate the requirement that expenses be “ordinary and necessary” in relation to a legitimate business activity. The expenses must also satisfy any other deductibility requirements (Internal Revenue Code Section 274).

Questions and Answers

Q. What happens when a promoter is investigated?

A. The government may file suit against the promoter to stop him or her from promoting the scheme. The court has ordered home-based business promoters to turn over to the government a list of their clients who purchased and/or participated in the abusive tax avoidance scheme.

Q. Can an individual avoid being subject to penalties if they relied on their return preparer or someone else who promoted the abusive scheme?

A. Reliance on the advice of a promoter does not guarantee avoidance of penalties. See Tax Court case Peete v Commissioner TC MEMO 2004-31. (PDF)

Q. Is it wrong to deduct costs associated with businesses, including home-based businesses?

A. The law allows individuals to claim legitimate business expenses. In order to be deductible, expenses must be ordinary and necessary expenses paid and incurred in carrying on a legitimate trade or business.  A business must truly exist prior to claiming business-related expenses.

Q. Can certain personal living expenses be deducted in connection with a business?

A. Any promotion that claims a person can deduct what would normally be personal expenses should be considered highly suspect.  Non-deductible personal living expenses cannot be transformed into deductible business expenses.  Forming an S Corporation, partnership, or any other pass-through entity does not cause personal, living and family expenses to become deductible. Incorporation, the existence of board minutes, and partnership agreements authorizing personal, living or family expenses do not cause these expenses to become deductible either.

Q. What should a person do who has deducted business expenses on a return that are actually non-deductible personal expenses?

A. File an amended return.  If the amended return results in additional tax owed, the taxpayer may also be subject to interest and penalties.  However, amending a return may reduce the amount of penalties and interest eventually owed.  For additional guidance on amending returns, seek the advice of a trusted tax professional, call the IRS at (800) 829-1040 or visit Amended/Corrected Tax Return Frequently Asked Questions on IRS.gov.

Q. What if a person does not amend their return?

A. If the return is audited, the possible penalties, interest, and legal costs associated with an abusive tax promotion can be significant.  Criminal sanctions may also apply including: criminal penalties, imprisonment, and fines. This is in addition to the tax due and fees paid for the promotion.  Contact the Internal Revenue Service at (800) 829-1040, if there are additional questions.

Q. How can the public report information to the IRS on promotions or promoters?

A. Contact the Internal Revenue Service at (866) 775-7474 or e-mail the Tax Shelter Hotline at irs.tax.shelter.hotline@irs.gov.

Q. How does a person who invested in an arrangement involving a home-based business abusive tax promotion get their money back?

A. A person’s ability to obtain any money paid with respect to a promotion is between the taxpayer and the person or entity paid.  If the person or entity has filed for bankruptcy protection, the taxpayer may consider filing a claim in the bankruptcy proceeding.

New Tax Guide Features Recovery Tax Breaks – Helps People Save on their 2009 Taxes

Here is the IR-2009-112, Dec. 4, 2009

WASHINGTON — Taxpayers can get the most out of new recovery tax breaks and get a jump on preparing their 2009 federal income tax returns by consulting a newly revised comprehensive tax guide now available on IRS.gov.

Publication 17, Your Federal Income Tax, features details on taking advantage of new tax-saving opportunities, such as the making work pay credit for most workers, American opportunity credit for parents and college students, energy credits for homeowners going green, first-time homebuyer credit, sales or excise tax deduction for new car buyers, and the expanded child tax credit and earned income tax credit for low- and moderate-income workers. This useful 308-page guide also provides more than 6,000 interactive links to help taxpayers quickly get answers to their questions.

Publication 17 has been published annually by the IRS for more than 65 years and has been available on the IRS Web site since 1996. As in prior years, this publication is packed with basic tax-filing information and tips on what income to report and how to report it, figuring capital gains and losses, claiming dependents, choosing the standard deduction versus itemizing deductions, and using IRAs to save for retirement.

Those who do not have access to the Internet can call 1-800-TAX-FORM (829-3676) to request a free copy from the IRS. Printed copies will be available in January 2010.

Besides Publication 17, IRS.gov offers many other helpful resources for those doing year-end tax planning. Many 2009 forms are already posted, and updated versions of other forms, instructions and publications are being posted almost every day. Forms already available include Form 1040, short Forms 1040A and 1040EZ, Schedule A for itemizing deductions, new Schedule L for those increasing their standard deduction by real-estate taxes paid, sales or excise taxes on new car purchases or a net disaster loss, and new Schedule M for claiming the making work pay credit.

In addition, the American Recovery and Reinvestment Act of 2009 Information Center features a variety of recovery-related videos, podcasts, tax tips and answers to frequently-asked questions.

Follow the Yellow Brick Road to B2B and B2C Social Networking by Daniel Stoica Accounting Professional, Part 12
Following the Yellow Brick Road I became aware of LinkedIn Learning Center which offers Training.
Learn at your own pace e-learning modules are available 24/7 for your convenience.
Modules available:
How to Join LinkedIn
Creating and Managing your Profile
Navigating Your Homepage
LinkedIn Subscriptions
Adding and/or Changing an Email Address
Managing Your Recommendations
Using LinkedIn and Twitter
Communicating on LinkedIn
Managing in Inbox
LinkedIn Answers
LinkedIn for Job Seekers
How to Join a Group
Creating a Group

Webinars
To help you get started using your account or to learn more about the features and functionality that LinkedIn offers, you can attend free online presentations.
Here is the link to the Training Resources page on LinkedIn:
http://learn.linkedin.com/training/
Have you attended any LinkedIn training Webinars or e-learning modules?
What has your experience been?
Looking forward to your comments!

Keeping Good Records Reduces Stress at Tax Time

IRS Summertime Tax Tip 2009-23

Although most people won’t be filing their tax returns for several months, the dog days of summer are actually a great time to start planning for the tax filing season by ensuring your records are organized. Whether you are an individual taxpayer or a business owner, you can avoid headaches at tax time with good records because they will help you remember transactions you made during the year.

Here are a few things the IRS wants you to know about recordkeeping.

Keeping well-organized records also ensures you can answer questions if your return is selected for examination or prepare a response if you are billed for additional tax. In most cases, the IRS does not require you to keep records in any special manner. Generally speaking, you should keep any and all documents that may have an impact on your federal tax return.

Individual taxpayers should usually keep the following records supporting items on their tax returns for at least three years:

• Bills
• Credit card and other receipts
• Invoices
• Mileage logs
• Canceled, imaged or substitute checks or any other proof of payment
• Any other records to support deductions or credits you claim on your return

You should normally keep records relating to property until at least three years after you sell or otherwise dispose of the property. Examples include:

• A home purchase or improvement
• Stocks and other investments
• Individual Retirement Arrangement transactions
• Rental property records

If you are a small business owner, you must keep all your employment tax records for at least four years after the tax becomes due or is paid, whichever is later. Examples of important documents business owners should keep Include:

• Gross receipts: Cash register tapes, bank deposit slips, receipt books, invoices, credit card charge slips and Forms 1099-MISC
• Proof of purchases: Canceled checks, cash register tape receipts, credit card sales slips and invoices
• Expense documents: Canceled checks, cash register tapes, account statements, credit card sales slips, invoices and petty cash slips for small cash payments
• Documents to verify your assets: Purchase and sales invoices, real estate closing statements and canceled checks

For more information about recordkeeping, check out IRS Publications 552, Recordkeeping for Individuals, 583, Starting a Business and Keeping Records, and Publication 463, Travel, Entertainment, Gift, and Car Expenses. These publications are available on the IRS Web site, IRS.gov or by calling 800-TAX-FORM (800-829-3676).

IR-2009-114, Dec. 8, 2009

WASHINGTON — Individuals and businesses making contributions to charity should keep in mind several important tax law provisions that have taken effect in recent years.

Some of these changes include the following:

Special Charitable Contributions for Certain IRA Owners

This provision, currently scheduled to expire at the end of 2009, offers older owners of individual retirement accounts (IRAs) a different way to give to charity. An IRA owner, age 70½ or over, can directly transfer tax-free up to $100,000 per year to an eligible charity. This option, created in 2006, is available for distributions from IRAs, regardless of whether the owners itemize their deductions. Distributions from employer-sponsored retirement plans, including SIMPLE IRAs and simplified employee pension (SEP) plans, are not eligible.

To qualify, the funds must be contributed directly by the IRA trustee to the eligible charity. Amounts so transferred are not taxable and no deduction is available for the transfer.

Not all charities are eligible. For example, donor-advised funds and supporting organizations are not eligible recipients.

Amounts transferred to a charity from an IRA are counted in determining whether the owner has met the IRA’s required minimum distribution. Where individuals have made nondeductible contributions to their traditional IRAs, a special rule treats transferred amounts as coming first from taxable funds, instead of proportionately from taxable and nontaxable funds, as would be the case with regular distributions. See Publication 590, Individual Retirement Arrangements (IRAs), for more information on qualified charitable distributions.

Rules for Clothing and Household Items

To be deductible, clothing and household items donated to charity generally must be in good used condition or better. A clothing or household item for which a taxpayer claims a deduction of over $500 does not have to meet this standard if the taxpayer includes a qualified appraisal of the item with the return. Household items include furniture, furnishings, electronics, appliances and linens.

Guidelines for Monetary Donations

To deduct any charitable donation of money, regardless of amount, a taxpayer must have a bank record or a written communication from the charity showing the name of the charity and the date and amount of the contribution. Bank records include canceled checks, bank or credit union statements, and credit card statements. Bank or credit union statements should show the name of the charity, the date, and the amount paid. Credit card statements should show the name of the charity, the date, and the transaction posting date.

Donations of money include those made in cash or by check, electronic funds transfer, credit card and payroll deduction. For payroll deductions, the taxpayer should retain a pay stub, a Form W-2 wage statement or other document furnished by the employer showing the total amount withheld for charity, along with the pledge card showing the name of the charity.

These requirements for the deduction of monetary donations do not change the long-standing requirement that a taxpayer obtain an acknowledgment from a charity for each deductible donation (either money or property) of $250 or more. However, one statement containing all of the required information may meet both requirements.

Reminders

To help taxpayers plan their holiday-season and year-end giving, the IRS offers the following additional reminders:

• Contributions are deductible in the year made. Thus, donations charged to a credit card before the end of 2009 count for 2009. This is true even if the credit card bill isn’t paid until 2010. Also, checks count for 2009 as long as they are mailed in 2009 and clear, shortly thereafter.
• Check that the organization is qualified. Only donations to qualified organizations are tax-deductible. IRS Publication 78, available online and at many public libraries, lists most organizations that are qualified to receive deductible contributions. The searchable online version can be found at IRS.gov under Search for Charities. In addition, churches, synagogues, temples, mosques and government agencies are eligible to receive deductible donations, even if they are not listed in Publication 78.
• For individuals, only taxpayers who itemize their deductions on Form 1040 Schedule A can claim deductions for charitable contributions. This deduction is not available to individuals who choose the standard deduction, including anyone who files a short form (Form 1040A or 1040EZ). A taxpayer will have a tax savings only if the total itemized deductions (mortgage interest, charitable contributions, state and local taxes, etc.) exceed the standard deduction. Use the 2009 Form 1040 Schedule A to determine whether itemizing is better than claiming the standard deduction.
• For all donations of property, including clothing and household items, get from the charity, if possible, a receipt that includes the name of the charity, date of the contribution, and a reasonably-detailed description of the donated property. If a donation is left at a charity’s unattended drop site, keep a written record of the donation that includes this information, as well as the fair market value of the property at the time of the donation and the method used to determine that value. Additional rules apply for a contribution of $250 or more.
• The deduction for a motor vehicle, boat or airplane donated to charity is usually limited to the gross proceeds from its sale. This rule applies if the claimed value is more than $500. Form 1098-C, or a similar statement, must be provided to the donor by the organization and attached to the donor’s tax return.
• If the amount of a taxpayer’s deduction for all noncash contributions is over $500, a properly-completed Form 8283 must be submitted with the tax return.

Follow the Yellow Brick Road to B2B and B2C Social Networking by Daniel Stoica Accounting Professional, Part 11

Following the Yellow Brick Road I became aware of video as a Social Networking medium and specifically YouTube.

YouTube is more than a multimedia marketing tool or a video sharing site or even a video blogging platform.

YouTube is a community.

YouTube offers the opportunity to create your own channel, which I did: http://www.youtube.com/user/DanielStoicaTax

YouTube offers the opportunity to create a short Profile on your channel.

YouTube allows you to subscribe to other users’ channels and be notified when they upload new videos.

YouTube allows you to upload videos.

YouTube offers the opportunity to create “Friends”.

YouTube offers the option to:

1. Comment on videos
2. Favorite a video
3. Share a video
4. Add a video to your Playlist
5. Rate a video

YouTube is the most Web 2.0 platform allowing interaction and cross platform sharing.

Have you joined YouTube?

What has your experience been?

Do you enjoy it?

Looking forward to your comments!