Posted by The TaxAdvocate Group, LLC

The IRS May Reject These 6 Tax Breaks

The IRS May Reject These 6 Tax Breaks

It’s normal for all of us to want to lower our tax bill but some people go overboard. There have been so many taxpayers over the years who argued they qualify for a certain tax break. Do you want to read their stories? Here are just some of them that might surprise you.

1. Because she wants to pay less self-employment tax, one successful author claimed that a huge amount of money she earned from her contracts with publishers and reports was for the use of her name and likeness. She decided she would report that portion as investment income on her 1040’s Schedule E. Needless to say, her argument was ignored by the Tax Court saying that part of her business as an author is her brand. She entered into a contract with the publishing company that didn’t allocate payments specifically for her name and likeness, and authors commonly build their brands and have their work promoted. Unfortunately, she ended up owing self-employment tax on all her income.

2. A busy tax prepare felt so harassed by clients calling her at all hours of the day and night at her home where she runs her business. She had to book a room at a local hotel sometimes for some peace and quiet. When she filed her tax return, she wrote the cost of her rest and relaxation as a business expense and treated it as a deduction. But the Tax Court said the cost of her good night’s sleep was a personal expense that is nondeductible.

3. To find out whether his father got murdered or committed suicide, a CPA had to pay private investigators and other experts millions of dollars. The CPA’s father died when he was just a child. The payments he made were entered on Schedule C as business expenses believing that if he gathered enough evidence, he would be able to write a book or create a movie out of it. The Tax Court, however, considered his activity as a hobby and removed the write-off.

4. A little girl started competing in beauty pageants when she was just 9 years old. Her prize money is between $1,000 and $2,000 each year and was deposited into her college savings account. The parents filed their returns reporting the income and took large write-offs for the travel costs, costumes, and other expenses. However, the child’s prize winnings were compensation for her services in the pageant which counts as her own income. Thus, she’s the only one who has the right to deduct the costs even though the parents made the expenditures. The parent’s deductions were denied by the Tax Court.

5. A staffing and consulting business ran by a woman in Washington, D.C., hired three children with an age range of 8-15 years. The job includes shredding, stuffing envelopes, copying and tending the yard around her home office.

The mother was also a tax preparer so she herself included the hours her kids worked on time-sheets and gave them W-2 forms.

She didn’t pay the children cash though but bought them meals such as pizza and paid for torturing instead. The Tax Court said she cannot deduct the kids’ “wages” as business expenses saying that the services performed by the children were considered more as parental training and discipline than part of employee activity. The write-off was denied.

6. There was a couple who operated proprietorships separately. The operation of the wife turned into a small profile while the husband’s business only brought up a sea of red ink. As they figured out their tax bill for self-employment, they claimed that they are allowed to offset the husband’s loss against the wife as they bonded in matrimony. They thought they can wipe out any tax liability as self-employment individuals.

According to the IRS, his losses could not lower down the self-employment tax bill on her income even though they were married. The Tax Court as the referee in this tax dispute sided with the IRS because the husband doesn’t have any involvement with the husband. 

As you can see from these stories, the IRS will reject a tax break if it doesn’t meet specific criteria. You may want to consider consulting a tax professional if you need help in filing your taxes and to avoid getting your tax break rejected by the IRS.

The TaxAdvocate Group, LLC
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