Abusive Home-Based Business Tax Schemes - Background
Most taxpayers with small businesses accurately report their income and expenses. However:
- Schemes involving inflated business expenses, deduction of personal expenses and misuse of purported home-based businesses have become prevalent.
- The IRS has become aware of several abusive tax schemes, which involve taxpayers erroneously deducting personal living or family expenses. Examples of these schemes are:
- Bogus home-based businesses: taxpayers attempt to create the appearance of having a home-based business - where none actually exists - and deduct personal, living or family expenses.
- Legitimate home-based businesses: taxpayers have a legitimate business operated from their home but erroneously attempt to deduct personal living expenses.
- These schemes have gained popularity due to aggressive marketing by promoters who sell such schemes as a means to reduce taxes.
- These schemes are abusive because they manipulate the interpretation of the tax laws.
- Some promoters market a package, kit or other materials that claim to show taxpayers how they can avoid paying income taxes but the arguments used have no merit.
- Abusive promoters typically advise taxpayers to maintain detailed records of their activities and the expenses they incur; however, detailed records do not convert personal, living or family expenses into deductible business expenses.
- Expenses must be "ordinary and necessary" in relation to a legitimate business activity, and satisfy all other requirements in order to be deductible business expenses on a tax return.
- Taxpayers should beware of claims that are too good to be true and seek independent professional tax advice.
Page Last Reviewed or Updated: 2012-08-02
