The accountant's client was an elderly woman who had once been a university professor. When her doctor suggested she take up dancing to improve her arthritic hips, she enrolled at the Arthur Murray Dance Studio.
"The first year, she brought in her tax data and wanted to deduct over $8,000 in dance lessons," the accountant says. "I got her to have her doctor write a letter and I believe I did deduct it the first year."
Ah, but you know how infectious ballroom dancing can be.
"The second year, she brought in receipts totaling over $35,000 for dance lessons and another $18,000 for gowns and expenses to travel on cruises for herself and her 'instructor' from this dance studio; he was in his 20s and she was about 85 by this time," the accountant says. "I was appalled and obviously did not deduct these expenses as medical -- although I was temped to call it a theft loss."
The accountant notified adult protective services, which launched an investigation of the situation. Her client died before it was completed.
8. Of guard cats and canine contractors
Taxpayers become pretty creative when it comes to devising ways to deduct their pets on their tax returns. In this series alone, we've featured one pet lover who claimed his dog as a dependent, another who attempted to write off the dog food for his "home security system," and yet another who claimed Fido as a landscaping subcontractor.Ed Mendlowitz, CPA at WithumSmith+Brown in New Brunswick, N.J., has heard it so much that he actually devised a tongue-in-cheek response:
"When I have a client ask me if they can deduct their cat or dog, I usually inquire in a very serious tone about their pet's age and whether the cat or dog is a full-time student. Parrots and other long-lived animals, by contrast, may qualify for elderly benefits."
9. Costly adoption
A Kissimmee, Fla., CPA inherited the case of a 65-year-old woman who took in a 20-something student renter and handyman. She liked the lad so much she decided to welcome him into her family -- at least on her taxes.The woman's original accountant never questioned the deduction, which incidentally enabled the woman to not claim the rental income from her new "nephew."
"There are guidelines CPAs use to determine whether or not a relative by blood, marriage or adoption is considered a dependent," the Kissimmee CPA says. "In this case, the young man was none of the above. She was confusing emotional attachment with an actual factual definition."
Long story short, the IRS caught on three years later and slapped Mom with $5,000 in back taxes and a $2,000 penalty for failing to disclose income.
The Kissimmee CPA came to the rescue, filed amended returns and eventually reclaimed part of the excess taken by the IRS.
Ironically, because the renter had remodeled part of her home, Mom could have offset that expense against the rental income and ended up with a better and legitimate deduction than claiming him as a dependent.