Abusive Home-Based Business Tax Schemes - Questions and Answers
Q. What happens when a promoter is investigated?
A. The government may file suit against the promoter to stop him or her from promoting the scheme. The court has ordered home-based business promoters to turn over to the government a list of their clients who purchased and/or participated in the abusive tax avoidance scheme.
Q. Can an individual avoid being subject to penalties if they relied on their return preparer or someone else who promoted the abusive scheme?
A. Reliance on the advice of a promoter does not guarantee avoidance of penalties. See Tax Court case Peete v Commissioner TC MEMO 2004-31. (PDF)
Q. Is it wrong to deduct costs associated with businesses, including home-based businesses?
A. The law allows individuals to claim legitimate business expenses. In order to be deductible, expenses must be ordinary and necessary expenses paid and incurred in carrying on a legitimate trade or business. A business must truly exist prior to claiming business-related expenses.
Q. Can certain personal living expenses be deducted in connection with a business?
A. Any promotion that claims a person can deduct what would normally be personal expenses should be considered highly suspect. Non-deductible personal living expenses cannot be transformed into deductible business expenses. Forming an S Corporation, partnership, or any other pass-through entity does not cause personal, living and family expenses to become deductible. Incorporation, the existence of board minutes, and partnership agreements authorizing personal, living or family expenses do not cause these expenses to become deductible either.
Q. What should a person do who has deducted business expenses on a return that are actually non-deductible personal expenses?
A. File an amended return. If the amended return results in additional tax owed, the taxpayer may also be subject to interest and penalties. However, amending a return may reduce the amount of penalties and interest eventually owed. For additional guidance on amending returns, seek the advice of a trusted tax professional, call the IRS at (800) 829-1040 or visit Amended/Corrected Tax Return Frequently Asked Questions on IRS.gov.
Q. What if a person does not amend their return?
A. If the return is audited, the possible penalties, interest, and legal costs associated with an abusive tax promotion can be significant. Criminal sanctions may also apply including: criminal penalties, imprisonment, and fines. This is in addition to the tax due and fees paid for the promotion. Contact the Internal Revenue Service at (800) 829-1040, if there are additional questions.
Q. How can the public report information to the IRS on promotions or promoters?
A. Contact the Internal Revenue Service at (866) 775-7474 or e-mail the Tax Shelter Hotline at irs.tax.shelter.hotline@irs.gov.
Q. How does a person who invested in an arrangement involving a home-based business abusive tax promotion get their money back?
A. A person’s ability to obtain any money paid with respect to a promotion is between the taxpayer and the person or entity paid. If the person or entity has filed for bankruptcy protection, the taxpayer may consider filing a claim in the bankruptcy proceeding.
Q. Is more information available?
A. Yes.
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