The Minnesota Society of Certified Public Accountants (MNCPA) recently surveyed CPA members in public accounting on the most outrageous tax deductions clients tried to take on their tax returns. Responses included everything from pets and weddings to cars impounded by the police.
Duluth CPA Craig Chilcote said the most outrageous situation he has ever experienced was a person who came in with absolutely no records. "He wanted to claim $100,000 in gambling income," Chilcote said. "We chose not to take him on."
Chilcote, managing partner of Anderson, Kuiti & Asuma in Duluth, said, "People say they want to start a church so they can give all their money to their own church, which you can't do."
Jenny Miller, a CPA with Kolquist, Seitz and Goldman in Duluth, said she often gets clients who want to claim their hobbies as businesses, hobbies such as race cars, horse ranches and hobby farms. While some of these activities may be legitimate businesses, she cautions, "There are a whole bunch of tests that you go through to determine whether this is a business." She said she once had a client try to write off a boat for his road construction business.
"Creativity is rewarded in many parts of society, but not by the IRS," said MNCPA Chair Bob Sannerud. "While there can be some exceptions, many of the deductions our members identified would've raised red flags from the IRS. A CPA can best advise clients on whether a deduction should be removed from their tax returns."
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Tax laws become more complex every year. With changing tax laws at the state and federal level, not to mention the differences between state and federal tax regulations, it is difficult for individuals and small-business owners to stay up to date. This underscores the value of CPAs to their clients.
"Claiming an error on your tax calculations because tax preparation software said it was 'OK' doesn't cut it with the IRS," Sannerud added. "CPAs are professionals who understand and monitor changing tax laws year-round, and serve as valuable advisers to their clients on tax planning and preparation."
Here is the MNCPA list of the strangest - and unacceptable - deductions for 2014:
Questionable dependents: Attempting to claim "Fido" as a dependent is popular amongst clients with pets. One CPA reported a woman tried to claim her unborn child as a dependent.
A daughter's wedding: Sure, weddings are entertaining. But deducting the full cost as an entertainment expense does not make for a good relationship with the IRS.
Speeding tickets: Even if it's because you were late for a business meeting, speeding tickets are fines and therefore, not deductible on your tax return.
Misinterpretations of charitable donation: Charity can take on many forms. But for one CPA's client, a vehicle that was impounded by the police was not deemed a qualifying deduction.
Hobbies: The IRS does not allow deductions for hobby expenses. One client learned that when he attempted to take deductions on his horse ranch.
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Keeping up appearances: While some professions may require a certain appearance, the cost of haircuts, plastic surgery, massages and salon expenses are generally not deductible.
Creative investments: The loss on the sale of a personal house, while unfortunate, does not qualify as an investment by the IRS.
Expansive home office expenses: Deductions on a home office are limited to the portion of the home dedicated to the business. Clients have attempted to do more though, from the cost of groceries to the mortgage.
Boats: Want smooth sailing on your tax return? Then you should not deduct your boat as a "water computer," as one CPA had to inform their client.
Hunting trips because you "talk business": That weekend of hunting with friends is generally not deductible, no matter how often you talk about your boss.
The Minnesota Society of Certified Public Accountants (MNCPA) states its interest is to serve the public interest by advancing the highest standards of ethics and practices within the profession. Visit www.CPAmeASAP.com or call (800) 331-4288.
