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"The 10 wackiest tax write-offs

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"The 10 wackiest tax write-offs

"Is a wedding a business meeting if you invite clients? Can you buy peace and quiet, then take a deduction? Here’s our annual look at both daring and dumb attempts to whittle tax bills.
By Bankrate.com
Source MSN Money

"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?

That's right, 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 tedious.

In our first installment, taxpayers sought deductions for everything from ostrich breeding to sperm donations. In round two, doggy day care and a pimped-out Amish buggy led the list of questionable claims.

But this year's strange-but-true collection from certified public accountants around the country may be the most bizarre yet, not only for their sheer audacity but also for the few that managed to slide by the Internal Revenue Service.

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 federal income-tax returns.

It's also just plain dumb. What, like the IRS doesn't know that deductions are the biggest temptation in the tax code?

"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, Texas.

"You want to look at your returns in the same way your physician looks at your heart rate -- you want it to be about the same all the time. When it starts moving around a lot, the IRS wants to see why. When you have big swings in income or big swings in deductions, the IRS likes to check to make sure you're still alive. They're going to come take your pulse, and you might get a full body probe."

To avoid that, uh, full body probe, it's best to steer clear of the following crazy tax tactics.

1. It went up in smoke

Hatter must have thought he was hallucinating when one of his clients, a criminal-defense attorney, referred a marijuana dealer to Hatter. 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," 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. It was quite an education on my part."

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. I had no basis for it because he dealt in cash."

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 simply throws in cash "as the spirit moves me."

Campbell says the IRS agent paused to consider the taxpayer's response and then offered this advice: "I understand how the spirit can move you. So my advice to you is to 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, whatever the spirit may dictate. It makes no difference how much you give, just as long as you have a copy of the canceled check.

"This way both the spirit and the IRS will be pleased."

3. Silence is golden -- and deductible

While we're on the subject of charitable deductions, Allyson Baumeister, a CPA at 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.

"The deduction was limited to a percentage of his income, but his income was such that that wasn't a problem. From what I recall, the IRS may have adjusted the value somewhat, but it did allow the deduction," Baumeister says.

Seems everything is bigger in Texas, even the charitable deductions.

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 by the firm and the client until one day they received a phone call from the IRS. The agent apologized that the deduction was being disqualified, even though, as the agent politely agreed, it might indeed be justified.

5. But you can write off the pimp hat

When does an entertainment expense exceed IRS criteria? Ed Mendlowitz, a CPA with WithumSmith+Brown in Morristown, N.J., found out the funny way when a businessman client wanted to deduct the cost of a call girl he hired to entertain some clients.

When Mendlowitz told the businessman he'd have to present said contractor with a Form 1099 to support this business expense, the client declined to do so and 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 -- are often inclined to work their accountant 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 for therapeutic reasons."

The craziest "Zoolander" deduction? New Jersey CPA Alan Sobel wins the prize: "Deductions are sometimes claimed for money given to infants for 'modeling' for their parents," he says. Seriously.

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 Hatter's surprise when a client-attorney listed $50,000 in entertainment expenses on his tax return -- quite a chunk considering the guy's gross income was in the $300,000 range.

"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.'"

What was the lawyer's occupation? Criminal-defense attorney!

9. Finally, the Social Security crisis solved

Warning: If parents ever start documenting this deduction, we'll no longer need to worry about Social Security.

Marcia Geltman, a 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. "Let us hope that, in the long run, we receive more blessings from our children then these momentary aggravations.

10. Inflated assets

It's a classic feel-good-all-over tax case that has grown to mythic proportions over the years. Hatter explains: "The one they always talk about at CPA classes is where a 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.

"The IRS challenged her, it went to the tax court, and she won."

This article was reported and written by Jay MacDonald for Bankrate.com."

http://articles.moneycentral.msn.com/Taxes/AvoidAnAudit/The10WackiestTaxWriteOffs.aspx

Entry #979

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