Blatantly Illegal Tax Deductions

Blatantly Illegal Tax Deductions

Since we are currently in the midst of tax season, just for fun I thought I’d share some of the more creative tax deductions taxpayers have attempted to get away with.  Warning: do not try this at home!

From the Minnesota Society of Certified Public Accountants comes the following:

  • A woman tried to claim her unborn child as a dependent.
  • A newlywed couple deducted the full cost of their wedding as a business entertainment expense. (Makes you wonder what kind of business they were in.)
  • A business executive deducted the cost of a speeding ticket on the grounds that she was late for a business meeting. (Note that speeding tickets are fines and therefore not deductible.)
  • A taxpayer owned a vehicle that had been impounded by the police. He tried to deduct it as a charitable donation. Alas, the IRS was not that charitable about the situation.
  • A businessman who had purchased a ranch for horse riding and whatever other pleasure one gets from owning a ranch attempted to deduct the cost of operating the ranch. (The IRS does not allow deductions for hobby expenses.)
  • A family tried to take a capital loss against their taxes when forced to sell their home at less than they paid for it. Unfortunately, losses from the sale of personal-use property – such as your home or car – are not deductible. (Yes, I know that’s not fair, since you have to pay capital gains taxes when you’ve made money selling those very same assets. Go complain to your congressman.)

My favorite illegal tax deduction story comes from an ex-IRS agent who swears this is true.  The names have been changed to protect the innocent.  (Note that this occurred a number of years ago, before the IRS tightened up the charitable deduction rules.  You could not get away with this today.)

Bob, an experienced IRS agent, had been reviewing returns that the IRS computer had flagged.  One of those returns showed a charitable deduction to a Catholic Church for $27,356.  The computer had flagged the amount as high relative to the taxpayer’s Adjusted Gross Income (AGI), which was only $85,000.  But that wasn’t what caught the agent’s eye and ultimately motivated him to investigate further.  It was the taxpayer’s name: Israel Steinberg.

The agent decided to call in Steinberg to ask for proof of his deduction.  Steinberg arrived on the appointed day and brought with him dozens of cancelled checks for various amounts paid to the church on various dates.  The total added up to exactly $27,356.  Bob could do little except thank Steinberg and send him home.  But he was still not satisfied.  “You get a feeling about certain situations,” he told me when relating the story, “and something just didn’t feel right about this one.”

So Bob decided to pay a visit (at taxpayer expense, of course) to the church to which Mr. Steinberg appeared to be so generous.  When he arrived and introduced himself, his first question to the priest was, “Father, do you know Israel Steinberg?”

“Oh, yes,” was the reply.  “Very well.”

The agent in Bob couldn’t let things go at that, so he probed a little further.  “Is he a member of your church?”

The priest laughed.  “No, of course not.  He’s Jewish.”

“Well,” persisted Bob, “in what way do you know him?”

“Oh, every week or so he comes in, we give him the collection plate money we received that week from our parishioners, and he writes us a check for the amount.”

Suffice it to say that in addition to the civil penalties imposed by the IRS, Steinberg was prosecuted for criminal fraud and spent a period of time in jail.  And just in case you’re wondering, he did not attempt to deduct any of his legal or internment costs from his taxes!

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