Outrageous Tax Deductions Approved by the IRS

Getting creative at tax time is something many people do, pushing the limits on deductions to reduce their tax bill. The goal is to receive the maximum amount of deductions without getting a knock on the door from Uncle Sam. You may be surprised at what the IRS allows tax filers to deduct - everything from music lessons to organic foods.

If your deduction seems like a stretch, your tax practitioner should be informed and savvy enough to scour previous tax court cases or IRS filings in order to back up your claim. Of course, accurate record keeping to back up your deductions is required - make sure to keep receipts for medical expenses, donations, or business expenses. If your deduction is denied, you could face back taxes, plus interest and penalties.

Here are some ten unusual deductions approved by the IRS.

Cat Food

South Carolina scrap yard owners in 2001 wrote off $300 for the cost of cat food as a business expense, claiming the food attracted wild cats to the business to scare off snakes and rats. The deduction was approved.

Organic Foods

To treat severe allergies to chemically contaminated food, a Chicago couple in 1971 could eat only pricey organic food as prescribed by three different doctors. The pair deducted as a medical expense the difference in price between the organic food and regular food treated with chemicals. The U.S. Tax Court allowed the $3,000 deduction.

Boarding School

In 1944, the U.S. Tax Court said a taxpayer from Cleveland could write off almost $1,000 for costs related to sending his daughter to a boarding school in Tucson, Arizona. The five-year-old girl suffered from chronic bronchitis, sinusitis and asthma, and was sent to the school in the warmer weather for her health — on doctor’s orders. Her health improved and the deduction was considered a medical expense.

Tanning Oil

A Wisconsin bodybuilder deducted almost $14,000 from 1999 to 2001 for the cost of three body oils — including a tanning product — that helped his career. The U.S. Tax Court allowed the business expense write-off because the oils were primarily marketed in bodybuilding magazines, instead of sold to the public.

Clarinet Lessons

In 1962, the IRS ruled that a taxpayer could deduct the costs of a clarinet and clarinet lessons for his son because an orthodontist recommended playing the instrument as a way to treat his severe overbite.

Breast Implants

An exotic dancer in 1988 wrote off about $2,000 for the depreciation of her breast implants, arguing to the U.S. Tax Court that the implants were a “stage prop” that boosted her earnings substantially. Before the implants, she made up to $750 a week. After, her earnings in a 20-week period were $70,000, or about $3,500 a week. The U.S. Tax Court ruled that her implants — size 56N after a second surgery — were for work rather than a personal benefit, and allowed the deduction.

Cat Food, Part 2

A woman used her own money to care for feral cats that she fostered in her home for a charity that specialized in the neutering of wild cats. She spent more than $12,000 of her own money paying for vet bills, food and other items.

The Tax Court ruled that she can claim a charitable deduction for her expenses, but limited her write-off because she didn’t meet the substantiation rules, failing to procure a contemporaneous written acknowledgment from the charity each time she spent $250 or more on the charity’s behest. With the proper documentation, she could have deducted all the costs she incurred for the organization.

Babysitting Fees

Fees paid to a sitter to enable a parent to get out of the house and do volunteer work for a charity are deductible as charitable contributions even though the money didn't go directly to the charity, according to the Tax Court. The court expressly rejected a contrary IRS revenue ruling.

Swimming Pool

A taxpayer with emphysema put in a pool after his doctor told him to develop an exercise regime. He swam in it twice a day and improved his breathing capacity. Turns out he swam in the pool more than his family did. The Tax Court allowed him to deduct the cost of the pool (to the extent the cost exceeded the amount it added to the value of the property) as a medical expense because its primary purpose was for medical care. Also, the cost of heating the pool, pool chemicals and a proportionate part of insuring the pool area are treated as medical expenses.

Airplane

Rather than drive five to seven hours to check on their rental condo or be tied to the only daily commercial flight available, a couple bought their own plane. The Tax Court allowed them to deduct their condo-related trips on the aircraft, including the cost of fuel and depreciation for the portion of time used for business-related purposes, even though these costs increased their overall rental loss on the condo.

Denied!

There is such a thing as going to far with unique deductions. Here are five instances when odd deductions were denied by the IRS.

  • Writing off your life: One taxpayer with a real estate business calculated the value of his life, time and expertise to his business, coming up with $1.75 million. He then tried to amortize that amount as a business expense, but the IRS said no.

  • Deducting crime costs: The owner of a failing furniture store paid someone to burn down his store. As he should, he reported the insurance he received as income to the IRS. But he went one step too far and deducted what he paid the arsonist as a consulting fee — and admitted that during the IRS audit. Oops!

  • Dress for success: A businessman tried to write off the cost of a mink coat for his wife to wear to business functions. It wasn’t allowed.

  • Groceries as medicine: A diabetic on a restrictive diet tried to deduct the costs of lettuce, tomatoes, artificial sweeteners and reduced-salt foods as medical expenses. The IRS denied the claim.

  • Super Bowl gambling loss $2: That's not a misprint. One client wanted to file for a gambling loss on a $2 bet on the Super Bowl. While gambling losses can be deducted by following instructions from the IRS, $2 leaves a bit to be desired. Better luck next year.

Rebekah Roy
Tax ID Theft

Tax ID theft: Here’s what to look for and what to do when it happens

Tax-related identity theft occurs when a thief uses someone’s stolen Social Security number to file a tax return and claim a fraudulent refund. The victim may be unaware that this has happened until they e-file their return. Even before the victim files their return, the IRS may send the taxpayer a letter saying the agency identified a suspicious return using the stolen SSN.

Here are some things you should know about identity theft, including warning signs and steps to take after identity theft occurs.

Warning signs that a theft occurs
Taxpayers should be alert to possible tax-related identity theft if they are contacted by the IRS or their tax preparer about:

  • More than one tax return being filed using the taxpayer’s SSN.

  • Additional tax owed.

  • A refund offset.

  • Collection actions taken against the taxpayer for a year when they did not file a tax return.

  • IRS records indicating they received wages or other income from an employer for whom the taxpayer did not work.

If you suspect you are a victim of ID theft, you should continue to pay their taxes and file their tax return, even if you must do so on paper.

Remember, the IRS does not initiate contact with taxpayers by email to request personal or financial information. This includes any type of electronic communication, such as text messages and through social media channels.

Please contact us if you suspect there has been ID theft and we can help you take necessary steps to protect yourself.

Rebekah Roy
What to do if your employer closed and you are missing your tax forms

Employers are legally required to provide each employee with From W2 that reports earnings for the tax year. However, if your former employer has closed the business and you are unable to contact them, there are steps that can be taken to ensure your filing requirements are met.

We can help! Contact us today to file your tax return on time and avoid any penalties from the IRS.

Rebekah Roy
What to Expect From the IRS During the Shutdown

The current government shutdown has taxpayers on edge with tax season right around the corner. Earlier this month, the Internal Revenue Service (IRS) announced that tax filing season opens on January 28, 2019 and that tax refunds will be issued during the shutdown.

The details about IRS plans to operate during the government shutdown can be found ion the Treasury website n the updated Lapsed Appropriations Contingency Plan. You can read all 132 pages here.

For a quick snapshot of what’s happening, here you go:

  • Returns will be accepted

  • Refunds will be paid

  • The IRS website will be operational

  • No live person assistance is available by phone or appointment

  • No new audits

The IRS will accept paper and electronic tax returns during the filing season. Filing electronically will speed processing and refunds.

The IRS has confirmed that “refunds will be paid” but taxpayers are cautioned that returns would continue to be subject to refund fraud, identity theft, and other internal reviews (as in prior years).

If you have a scheduled appointment related to an examination/audit, collection, Appeals or Tax Advocate case, you should assume those meetings are canceled during the shutdown. The IRS says that it will reschedule those meetings after the IRS reopens.

The IRS is opening the mail and they are cashing checks (I can attest to the latter on behalf of my clients). However, the IRS will not respond to most paper correspondence during the shutdown. Taxpayers who mail letters or other correspondences to the IRS during the shutdown should expect to wait for a response. Remember, even after the IRS reopens there will be a delay in response due to “a growing correspondence backlog.”

Tax Court is closed. Trial sessions which were scheduled for this week (January 14, 2019) were not affected. However, some trial sessions scheduled during the week of January 28, 2019, have been canceled. A decision regarding trials sessions scheduled for the week of February 4, 2019, will be made on or before January 18, 2019 (more here).

Finally, a significant number of Criminal Investigation (CI) employees will continue to work. CI is expected to operate at close to normal levels which makes sense as the bad guys aren't taking a break.

If this feels overwhelming, there are a few bright spots: The IRS will not be conducting audits, and no collection activity will generally occur except for automated collection activity. However, that doesn’t mean that letters won’t go out. Automated initial contact letters for audits, as well as automated IRS collection notices, will still be issued.

That’s a snapshot of the IRS plan during the shutdown as of today. The takeaways: Be prepared to wait. And, of course, be patient.

Rebekah Roy
2019 Mileage Rates Announced

2019 Mileage Rate Increase

Starting on Jan. 1, 2019, the standard mileage rates for the use of a vehicle will be:

- 58 cents for every mile of business travel driven, an increase of 3.5 cents from the rate for 2018.
- 20 cents per mile driven for medical or moving purposes, an increase of 2 cents from the rate for 2018.
- 14 cents per mile driven in service of charitable organizations.

You also have the option of calculating the actual costs of using your vehicle rather than using the standard mileage rates.



Rebekah Roy
Let's Talk Taxes

Home Office Deduction

You’ve decided to start a small business working out of your home. Life is great and you can’t beat the commute. Now, how will this affect your income taxes? Can you deduct expenses for use of your home? The answer is that it depends…on a lot of things.

First of all, the business must be for profit or an expectation of profit. Next, you must set aside an area that is used exclusively for this business. Perhaps you’ve set up a room with a desk, computer, file cabinets, and storage for your product. Use the room entirely and exclusively for business purposes and it will be deductible. Beware, however, that as soon as you add a sofa bed in the corner for your in-laws to use when they come to visit, the space is no longer exclusive and you lose the deduction.

What is eligible for a deduction? This is where the math comes in. You must determine the total square footage of your home and the total square footage of the office. Example: Total house is 2000 square feet and the office area is 200 square feet. This will give you a 10% office usage equation. You will then be allowed to deduct 10% of your costs for the upkeep and maintenance of your home which includes insurance, taxes, mortgage interest (or rent if you do not own), electricity, gas, and repairs for the entire house. Additionally, you can take specific fix-up and maintenance costs in full if they are solely for the business space.

Also available is a deduction for depreciation on the home. To determine this figure, use the cost of the house, less the value of the land, and depreciate this value over 39 years (commercial use value). When you sell the home, you must make an adjustment for the amount of the depreciation taken. This depreciation adjustment is recaptured on your tax return at the 25% tax rate.

Be sure you fully understand the home office deduction and subsequent depreciation recapture before using it. Rules for the home office deduction can be tricky; therefore it is wise to get professional tax help from an enrolled agent, America’s tax expert.

The author is an enrolled agent, licensed by the US Department of the Treasury to represent taxpayers before the IRS for audits, collections and appeals. To attain the enrolled agent designation, candidates must demonstrate expertise in taxation, fulfill continuing education credits and adhere to a stringent code of ethics.

Rebekah Roy
Let's Talk Taxes

Greetings from the IRS

You’ve just picked up your mail and … uh oh, there among the ads, bills and too numerous offerings for credit cards is that official looking letter from the Internal Revenue Service. A feeling of dread comes over you…but don’t panic or toss it, and please DO open it. It might even be good news.

Usually, mail from the IRS is a notification that they need verification of documents or substantiation of an amount you have claimed on your tax return. Read the letter thoroughly. Determine what they are looking for, and then provide the information. Some of the most commonly missed items on a return are simple things: you forgot to sign the 1040; you didn’t attach W-2’s and required statements; if you’re paying quarterly, maybe you claimed the wrong amount as estimated tax; or, perhaps the income you listed doesn’t match the figure that was reported to the IRS on a Form 1099 by someone who paid you during the tax year.

If you have the correct information, it’s a simple matter to fix. Make copies of your documents verifying the information on your return and send the copies back to the IRS along with a copy of the letter they sent to you. If, in fact, you didn’t include an amount on your return that should have been there, sign the form agreeing to the change and send them a check for the amount of tax due by the deadline date given for compliance. Usually, penalties and interest will be added—so, the sooner you comply, the less it will cost.  

If your IRS letter advises you that your return has been selected for audit, you would be wise to seek professional advice. If you prepared your own return, you may wish to contact an enrolled agent immediately. Enrolled agents are authorized by the U.S. Treasury Department to represent taxpayers before all administrative levels of the IRS for audits, collections, and appeals. 

Now you’re thinking, what about that possible good news mentioned earlier? It could be that the notice is for an unexpected refund, of course. Now, open that letter!

The author is an enrolled agent, licensed by the US Department of the Treasury to represent taxpayers before the IRS for audits, collections and appeals. To attain the enrolled agent designation, candidates must demonstrate expertise in taxation, fulfill continuing education credits and adhere to a stringent code of ethics.

 

 

 

Rebekah Roy
August Newsletter

Are you ready for qualified education expenses and important tax deadlines?  Here are our tax insights for August.  Stay up to date with our monthly newsletter.  Contact us today to review your situation and ensure there are no surprises later!

Rebekah Roy
July Newsletter

It's time for a mid year checkup on your tax "health".  Stay up to date with our monthly newsletter.   Contact us today to review your situation and ensure there are no surprises later!

Rebekah Roy
Taxpayer Alert
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A sophisticated phone scam targeting taxpayers has recently been reported to Maine Revenue Service. The automated call claims to be from MRS and tells the taxpayer they overpaid taxes in 2016 and is owed a refund. They alter the caller ID to make it look like the call is coming from a legitimate State of Maine phone number. MRS will not call a taxpayer about a refund and has reported this incident to Maine State Police Computer Crimes Unit.

Rebekah Roy