It's one thing to push the envelope, another to volunteer for the IRS audit list. Here are some of the most imaginative -- and most illegal -- deductions I've seen.
By Jeff Schnepper
I'm not known to be a superconservative tax planner. I'm willing to push the envelope as long as we stay on the right side of fraud and there's a legitimate basis for the deductions my clients claim.
But even I have limits. Here are some of the dumbest, most illegal deductions I've seen. And you should think twice -- at least -- before trying to claim them.
The bubble
It's hard for me to even write about this one without shaking my head. Here's the story, and if it hadn't been my client, I'd have trouble believing it myself.
The client lives in New Jersey. Northern New Jersey is infamous for its pollution and poor air quality. So my client was told to deduct, as a medical expense, the cost of enclosing himself and his family in a bubble of pure air.
I won't get into how that cost was conceived -- or whether the bubble was a split level or just a garden-variety bubble. Suffice it to say that the prior preparer had the chutzpah (that's a technical accounting term) to actually write "pure bubble" on the client's tax return.
Needless to say, the client was audited on his "bubble" deduction. Fortunately, the IRS audit agent had some perspective and a sense of humor. While the deduction was disallowed, it was so outrageous that the agent waived all penalties.
The home office
If you work out of your house, you may potentially qualify for a home office. The space claimed must be used regularly and exclusively for business purposes. Somehow, clients neglect to read that word "exclusively."
I had one client come to me after claiming a home office recommended by a prior preparer. He had a legitimate office at home, so the preparer had him deduct the full $80,000 cost of the home. Years later, I can still hear the IRS auditor laughing about that one.
Another client actually flew me from Cherry Hill, N.J., to St. Louis to represent him in a Tax Court case where he claimed 98% of his house as a home office.
At least he took the appropriate depreciation route rather than deducting 98% of the full cost of the house. Once again, the adage that bulls make money, bears make money and pigs get slaughtered was proved correct. He refused to compromise and was hit hard for taxes, interest and penalties.
He still insists that he was correct. He said the IRS action against him was a political attack. It's amazing how many nonprofessionals "know the real law" despite what the courts and the code say.
The whole house
Steve Bennett, president and CEO of Intuit, the maker of the TurboTax software program, reports this one:
A client gave away his house to a local fire department to burn up in a training exercise. So far, so good. It appears to be a legitimate, allowable charitable contribution that was made to an appropriate organization.
But here's the kicker: The value of the property actually went up once the house was removed.
Because the value increased, sorry, there could be no deduction.
The car
I've had a number of clients who thought if they painted the name of their businesses on their cars they could deduct 100% of their auto expenses. And then, they argued (might as well go for it) that they should be able to deduct the entire cost of their vehicles.
Sorry, that doesn't work. All you get is an advertising deduction for the cost of the paint and the labor of the auto artiste.
As for the auto expenses, including the depreciation on the car, you take a deduction based on the business use only. That's business mileage divided by total mileage. So, if you drove 10,000 miles during the year, 2,000 of which were for business, you get to deduct 20% of your auto expenses.
The body parts
The general rule is that there's no charitable contribution deduction where less than your entire interest in the property is contributed. There are exceptions. One is the contribution of an undivided portion of your entire interest in an asset. That could include, say, your 50% ownership share in a residence, a farm or a property that qualifies for conservation tax breaks.
But that hasn't stopped taxpayers from trying to take a deduction for donations of body parts. That just isn't going to work.
One woman who lost 200 pounds had her excess skin removed and actually donated it to a skin bank. The IRS couldn't wait to deny that deduction!
Pets
We all love our pets. But they really don't qualify as our dependents regardless of how much we spend on their upkeep.
Literally millions of dependents disappeared when the IRS demanded Social Security numbers for all claimed dependents.
That means that you not only lose the personal exemption for the pet, but the medical deduction for their veterinary bills as well. Sorry about that.
Well, if I can't claim them as dependents, perhaps I can get them to pay my tax bill with their charge cards. Both my dog and my cat have had Visa and MasterCard credit cards in their own names, sent by banks eager to add Frisco T.D. Schnepper and Fred T.C. Schnepper to their rolls. (T.D. is "the dog" and T.C. is "the cat.")
Busting the IRS
Just because a deduction is outrageous doesn't mean it's automatically disallowed.
In 1988, Cynthia Hess, a Green Bay, Wis., stripper known as "Chesty Love," claimed a $2,088 deduction for implants that enlarged her bust size. The IRS turned down her claim.
In 1994, however, Special Trial Judge Joan Seitz Pate ruled that the result of the implants increased Hess' income and allowed the deduction.
