Getting around taxes has been an American pastime since the 1773 Boston Tea Party. Image from Wikimedia Commons.

The amount of the average tax refund has been steadily increasing over the years, and so is the number of cases of tax fraud. The Internal Revenue Service has seen a rise in the number of fraudulent deductions taken on income tax returns. More people are trying to catch the government napping to scare up some extra cash.

Internal Revenue Service not amused with crazy deductions

Most Americans hate taxes, and finding ways to hoodwink, trick and blatantly lie to the tax man is practically a national pastime. The number of fraudulent tax returns, according to CNN, has skyrocketed since last year. The Internal Revenue Service received 335,341 tax returns that falsely claimed nearly $1.9 billion in deductions. That figure was a 181 percent increase over the number of similar returns last year, when the IRS received 119,484 returns that incorrectly claimed deductions totaling $721 million. However, not all of these returns were brazen acts of fraud, and the term “fraud” can be somewhat misleading.

False deductions aim to claim more money

The Internal Revenue Service investigated 230 people for questionable returns for Fiscal Year 2008 and 504 people for Fiscal Year 2010, according to the Internal Revenue Service website. In 2008, only 155 recommendations to prosecute were made and 301 were made in 2010. Those figures only include cases of bad deductions. The IRS made 1,507 recommendations for prosecution in total during 2010, according to USA Today. The reason people submit bad deductions on tax forms is simple — more deductions means more money. The average tax refund, according to the Wall Street Journal, was $3,003 for 2010, almost double the $1,698 average tax refund in 1999. The number of bad deductions in 2008 compared to 2010 suggests people are trying to claim greater deductions during lean years.

Houses, cars and kids most common bad deductions

The most common falsely or mistakenly taken deductions were for real estate, motor vehicles or children. The Treasury Inspector General for Tax Administration released a report that asserts the most problematic deductions were the Adoption Credit, the Qualified Motor Vehicle Deduction, the Non-Business Energy Property Credit, the Plug-in Electric Drive Motor Vehicle Credit and the First Time Homebuyer Credit. The Qualified Motor Vehicle Deduction and First Time Homebuyer credits caused the most trouble; the Treasury found that 218,069 people claimed $318 million in QMV deductions, but those people would have had to put off paying any sales tax or excise tax for 2009 and 2010. The First Time Homebuyer credit, according to the Los Angeles Times, paid out an estimated $513 million to people who didn’t necessarily qualify for it. At least $326 million was credited to 47,000 people who had previously owned homes.

Sources

CNN

Internal Revenue Service enforcement statistics

USA Today

Wall Street Journal

Los Angeles Times

Treasury Inspector General for Tax Administration

Children are legitimate tax deductions. Adult magazines are not. (Photo Credit: CC BY-SA/J.K. Califf/Flickr)

Monday, April 18 is tax day 2011, and some Americans will attempt to slip some very creative tax deductions by the IRS. From flattop haircuts to human sperm donations, auditors have seen it all. In the spirit of the occasion and prefaced with the warning not to try this at home, here are some of the craziest tax deductions enterprising U.S. taxpayers have attempted.

Holy travel and entertainment deductions, Batman!

Dallas CPA Ken Sibley told Bankrate of one client – a minister – who attempted to claim travel and entertainment expenses as tax deductions. Apparently, the minister was looking for real estate investment properties but never found his promised land after years of trying. Hence, it could not qualify as a business expense.

He was charitable enough to marry her

Deducting wedding expenses is a no-no, even under the category of business travel and entertainment expenses. Just because you invite business clients doesn’t make the wedding a business expense, a Massachusetts CPA said. And remember: your betrothed is not a charity, so you can’t count wedding expenses as charitable donations, either.

That’s a 30-year plan

New Jersey CPA Don Meyer spoke of the business manager of a famous entertainer who arranged for the purchase of a $2 million office building. The idea was that it would be deductible as a business expense, and the business manager was expecting to deduct the entire expense in the same tax year. Unfortunately, Meyer had to tell the business manager that it would take more than 30 years to recover the complete expense. Even a suitcase full of money and an ominous admonition to “make it work” couldn’t change the tax law.

Securing a lifetime of tax money

A home-based business can produce legitimate tax deductions, but claiming pets as security expenses won’t fly. Home security systems in general don’t fly with the IRS, either, says the Hunter Group of Fair Lawn, N.J. One client tried to declare a security system under the rationale that if her home was invaded and she was slain, she’d no longer be able to pay taxes.

Risky business

Dues and subscriptions for professional and trade publications may be listed as tax deductions, so long as you are a professional in an approved field. The deduction would fall under miscellaneous deductions if it meets the 2 percent floor rule (2 percent or more of total adjusted gross income), writes Quizlaw.

However, if you’re a self-employed real estate professional who is attempting to write off adult magazines under the dues and subscriptions deduction rule, take a long, hard look in the mirror and reconsider, says another Massachusetts CPA.

On a related note, Don Meyer once had a client who happened to be a prostitute. She wanted to declare her income, and listed “public relations” as her job.

Sources

Bankrate

IRS

Quizlaw

On deducting haircuts and sperm donations

Find a good source of information

Finding a good source of information is the first step. If you don’t have the time to research the things you need yourself, then find someone who already knows what to look for and where to find them. Start working with them on ideas and new ways to cut your taxes. Having all your information in order and getting it in early gives you and your tax person extra time to come up with effective ways to save money. If you already have a tax preparer, but he or she does not discuss saving ideas with you, find a new one who will. Unfortunately, some tax preparers get confused and think they work for the IRS — the good ones remember that they work for you!

Resources online

There are many resources online that will help you investigate your options. You can even look them up in the comfort of your own home or office. If what you’re reading confuses you, dig deeper to find another source. Someone else may have the same information but in a more user-friendly format. Knowing ahead of time that there are ways to save money on your taxes will help you persevere until you find the right opportunity for you.

Business taxes

Big corporations hire full time attorneys, and doing taxes is generally their only job. They watch the income and suggest new ways to help the big companies save money on taxes. Many people assume that individuals don’t have the same options and end up using payday loans online, instead. But whether you find yourself a knowledgeable person or do the research yourself, getting ready now to do your taxes can help keep more money in your own pocket, rather than flying out the window unnecessarily, straight into the pocket of the IRS.

1. Homebuyers

First-time homebuyers may be entitled to a credit of 10 percent of the price, for a maximum credit of $8,000. The homebuyer credit is not limited to first-time buyers. Buyers who owned homes and bought new ones after Nov. 6, 2009, may be entitled to a credit of 10 percent of the purchase price, for a maximum credit of $6,500. Buyers must have lived in their previous homes for five consecutive years in the past eight, must have a house under contract by April 30, 2010, and must close by June 30.

2. Energy-saving improvements

For 2009, homeowners may be entitled to credits worth 30 percent of the amount spent on energy-saving windows, water heaters and other qualified improvements, up to a combined limit of $1,500 for 2009 and 2010. Installation of solar, wind, or geothermal energy systems may entitle homeowners to 30 percent credits with no limits.

3. Vehicles

Sales taxes on purchase prices of to $49,500 for new cars, light trucks, motorcycles, and motor homes purchased after Feb. 16, 2009, can be deducted on 2009 returns. Vehicles purchased through the Cash for Clunkers program are included. Taxpayers do not have to itemize deductions to claim the credit, although in some states, it may sometimes be more advantageous to include sales taxes in itemized deductions. The credit is limited to certain income amounts, and depending on income, some taxpayers may receive only partial credits.

4. College students

In 2009 and 2010, the new American Opportunity Tax Credit allows taxpayers to claim $2,500 per student per year for the first four years of college. The Hope Credit provides $1,800 per student for the first two years of college, and the Lifetime Learning Credit offers up to $2,000. Income limits apply, and a taxpayer can use only one form of educational credit.

5. Unemployment

For 2009 only, the first $2,400 of unemployment income is nontaxable. Unemployed married couples may exclude benefits of up to $4,800. Whether or not you were unemployed, if you switched jobs or looked for a job, job-search expenses (travel, career coaching, employment agency fees, etc) may qualify as miscellaneous deductions. Combined miscellaneous deductions must exceed 2 percent of adjusted gross income to be written off. Taxpayers who were out of work last year and had to pay for COBRA or other health insurance may add those expenses to the usual out-of-pocket medical expenses, making it more likely that they’ll meet the deduction threshold of 7.5 percent of adjusted gross income.

6. Freelance work

Taxpayers who took on any kind of paid freelance work in 2009 to make up for pay cuts or job losses, must report the income but can deduct numerous business expenses, such as supplies, equipment and work-related vehicle mileage. In the case of a home office, freelancers may even be entitled to deduct  prorated amounts of mortgage payments and utility bills.

7. Moving for work

Taxpayers who relocated to accept full-time employment can sometimes deduct moving expenses like truck rental or moving company fees, packing supplies, storage and travel costs. To qualify for the deduction, the new job must be at least 50 miles farther from a taxpayer’s home than the previous job was.

8. Earthquake relief

Charitable donations to Haiti made before March 1, 2010, are deductible on 2009 tax returns. A new bill currently in the House would allow deduction of last-minute donations made to Chile before April 15, 2010, and would also extend the time for making donations to Haiti until the April 15 filing deadline.

9. Investment losses

Taxpayers who sold securities at a loss in 2009 after owning those shares for more than a year may use the losses to offset capital gains. If a taxpayer had losses and no gains, up to $3,000 of net loss can be set off against ordinary income and any remaining amount can be carried forward to future tax years.

10. Federal disaster areas

Homeowners whose houses were damaged in declared federal disasters and not fully covered by insurance may be able to claim the losses, even without itemizing deductions. For 2009 only, after subtracting the first $500 of the loss, there is no limit on the amount, and any losses that can’t be used in 2009 can be applied retroactively to 2008 taxes.

A lone restaurant stands in the rubble of the February quake in Port au Prince (photo: flickr.com)

A House bill was introduced yesterday which, if signed into law, will allow taxpayers to deduct last-minute, charitable donations for disaster relief in Chile from their 2009 tax returns rather than waiting to claim the deductions on their 2010 returns. In order to qualify as deductions for the 2009 tax year under the proposed bill, donations must be made to qualified, tax-exempt charities before the April 15, 2010, filing deadline.

In January, Congress passed a law making charitable donations to Haiti between January 11 and March 1 tax-deductible on 2009 tax returns. The new bill would also extend the time for making donations to Haiti until the April 15 filing deadline.

Worthy causes for cash advances

Taxpayers who have already filed returns and wish to make additional or last-minute donations may amend their 2009 returns or wait until next year to claim the deductions. The causes are so worthy and the tax-incentives so appealing that cash-strapped taxpayers may want to consider cash advance loans or even cash advances on credit cards as ways to get funds for donation.

Hoping to encourage further donations

According to CNNMoney.com, it is hoped that the bill, introduced by Sander Levin, the Democratic chairman of the House Ways and Means committee, and Dave Camp, a Republican on the committee, will encourage further charitable donations to these two countries, both of which are in dire need of aid.

Millions homeless and in need of essentials

It is estimated that 2 million people in Chile have been affected by the February earthquake and 708 have been reported dead. The January earthquake in Haiti left more than a million people homeless and an estimated 212,000 dead. The Haiti situation is now complicated by an outbreak of typhoid fever and officials fear that a cholera outbreak may ensue.

Generosity demonstrated even in tough economic times

Despite uncertain economic times, millions of individuals have given selflessly to these two countries recently struck by natural disasters unfathomable proportions. According to the US Chamber of Commerce, which tracks corporate donations for disaster relief have also been impressive. More than 350 corporate donors have provided a combined total approaching $150 million of disaster relief for Haiti.

If you have ever experienced an audit by the IRS or had your tax deductions denied you have probably experienced the powerless feeling of being up against an impossible opponent. You may have taken some initial steps to appeal the decision, but then fell short of a victory and decided to concede to the formidable adversary. If you won the battle you are among the lucky few. Most taxpayers fold under the pressure of fighting the IRS, even when they feel strongly that they are in the right.

A Bold Move

According to a recent Wall Street Journal article, a nurse from Maryland has won just such a case against the IRS. In 2006 Lori Singleton-Clarke filed her tax return for the previous year and included among her deductions $14,747 in tuition expenses for the M.B.A. that she had been earning online through the University of Phoenix. The professional who prepared her return advised her to include this deduction, stating that her situation fell within the stringent rules for claiming this type of deduction.

The Uphill Battle

It probably comes as no surprise to most people that the large deduction was initially rejected by the IRS Feeling that she was justified in claiming the deduction, Singleton-Clarke decided to pursue the matter further. She carefully investigated the intricate regulations for claiming such a deduction and became more convinced that her original filing of this expense was accurate. She pressed on in her quest.

Sheer Determination

What started out as an exchange of paperwork between Singleton-Clarke and the IRS quickly escalated into a very hard fought battle. There were seemingly unending documents requested by numerous individuals involved in the audit. The process itself was complicated enough that it likely would have prompted most people to surrender. After all of this, Singleton-Clarke was denied again so she made the decision to go to Tax Court. Without the funds to pay an attorney though, she chose to represent herself.

One of the Few

In court Singleton-Clarke relied on her impeccable organization and record keeping to present her side of the case. These habits turned out to be very impressive to the judge and helped to clearly outline the necessary details. Even though only about 10 percent of cases waged against the IRS are won by the individuals who choose to fight their assessments, the judge ruled in Singleton-Clarke’s favor. She was absolutely in shock upon receiving the decision. This ruling may even go on to help other students deduct these types of costs in the future. This is one can of worms that the IRS may regret having opened up.

Can You Cover what You Owe?

Unfortunately not everyone is fortunate enough to have large deductions that they can claim on their tax return. With tax season coming up and the tough economy persisting, expenses can become even tighter. If you find yourself short on cash after taxes you may want to consider a personal loan. It can provide you with the quick cash you need to get through the rough patch and when you apply at a reputable online site the process can be even faster and far less frustrating.

Industry analysts are predicting that a tangible change in the economy won’t be seen until mid-2010, but there are still some things you can do to lessen your tax liability this year.

• Increase 401k contributions. Any money you are allowed to pay into a 401k lowers your tax liability. Taxpayers can contribute up to $16,500 if they are under 50 years old and $22,000 if they are over 50 years old. There are still a few months left to increase contributions and cut down on taxes.

• Consider homeownership. It’s a buyer’s market and with a tax credit of up to $8,000 for first-time homebuyers from January 1 through April 30 of 2010, now is the perfect time to buy.

• Pay for college. The federal stimulus plan created tax breaks for college expenses. The American Opportunity Credit, which replaces the Hope Credit, lowers tax liability when taxpayers to meet certain requirements.

• Buy a car. The stimulus plan also included a tax break for new-car purchases. Anyone who buys a new car this year can deduct state and local sales taxes and excise taxes paid on a purchase price of up to $49,500. Car.com expert Miles Bradman said, “This is the perfect time to get a new car and not just from the purchase price standpoint. In former years a consumer may have needed a large loan to cover a down payment, whereas now small unsecured personal loans could very well do the trick.”

• Give to charity. Taxpayers who itemize deductions can sometimes write off charitable contributions. Industry analyst Martin Berg of Money.com stated, “A lot of people forget to count their cash gifting when calculating donations. Always include cash and appreciated stock and noncash donations. They can also count out-of-pocket costs to help a charity like 14¢ per mile in travel costs to do charitable work.”

• Self-employed tax breaks. For self-employed there taxpayers are many additional ways to decrease taxes. The cost of equipment like printers, fax machines and computers can often be deducted from, along with home-office expenses such as percentages of rent, homeowner’s insurance, and utilities.

• Medical expenses. For those who itemize deductions, medical expenses can lower a tax bill substantially. A taxpayer qualifies for this deduction if expenses for medical costs exceed 7.5% of adjusted gross income. Tax experts advise that you should keep track of medical bills and be ready to use them when tax time comes.

Use the various deductions wisely

In the end, it is possible to decrease tax liability by using any or all of the above tools. For any taxpayer who believes that he or she may have a large tax liability for 2009, it’s useful to know what the rules are for taking deductions. They can make the difference between having to come up with a substantial amount of money, breaking even, and even getting a refund.
Before you make any decisions concerning tax reporting or the claiming of tax deductions, be sure to get advice from an experienced tax professional.