10 wackiest tax write-offs
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 he was defending 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
Since we're on the subject of charitable deductions, Allyson Baumeister, CPA, of Sanford, Baumeister & Frazier in Fort Worth, Texas, recalls one prominent client who found a creative solution to a chronically noisy next door neighbor: He bought the house from the fellow, 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," says Baumeister.
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, 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.
|-- Posted: March 21, 2008