Tax Scam: Abuse of the Home Based Business

Small business owners who operate exclusively from their homes should be on the lookout for tax schemes aimed at home businesses. It is important to understand how to properly file your taxes and which deductions can be claimed to lower your tax liability.

The IRS is aware that tax schemes abound and often times innocent filers end up following advice that can get them in hot water with the government. For this reason the IRS has provided tips for home-based business owners to help avoid falling for these scams.

By pointing out scenarios which may result in filing fraudulent information on your income tax return, the IRS hopes to help business owners file their tax returns properly. Taxpayers are reminded that whether you intentionally set out to participate in a scheme or do so inadvertently, you remain responsible for the information submitted on your tax return and the subsequent consequences.

Dangers of Home-Based Business Tax Schemes

Owners of home-based businesses are allowed to deduct certain expenses and reduce their tax liabilities in perfectly legal ways. It is only when a tax scheme is involved which manipulates or misinterprets the tax laws that filers may find themselves in trouble. Any person or company that suggests a business owner can deduct all or most of their personal expenses as a business expense should be avoided. If you fall for one of these schemes, you may be able to make corrections to improperly filed tax returns; however, you may also have to contend with an even larger tax liability due to penalties and fees.

The IRS points out that any advice suggesting the following should be considered highly suspicious as it is misleading and incorrect.

It is not necessary to have a business to file business expenses. Obviously a business must exist before you can claim expenses as “business related”. Personal, living and family expenses can be deducted as business expenses. Again, in order to truly be considered a business expense, the amount being claimed as a deduction must be directly related to a legitimate business. All expenses can be deducted.  The IRS considers the following to qualify as a deduction: “the expenses must be ordinary and necessary expenses paid or incurred in carrying on a trade or business.”

Expenses that Cannot Be Used as Deductions

The following examples describe expenses that are often claimed as deductions which represent a misinterpretation of the law.

Automobile expenses that are claimed fully as business expenses when the vehicle is used for both personal and business travel. Meal, entertainment and travel deductions that are not related to the business, i.e. using every receipt as if were associated with a client or potential client.

Deducting payments to family or household members for routine tasks traditionally performed in the home or paying a family member excessive amounts for work related responsibilities.

Family members may not be considered “employees” for the sole purpose of deducting medical expenses. Excessive “business use of the home” expenses. Home based business owners are permitted to deduct a percentage of expenses in relation to the amount of their home used primarily and exclusively for home business. You cannot increase this “area” by placing a fax machine in one room and a copy machine in another.

It is imperative that home business owners follow the rules and regulations set forth by the IRS for business related expenses. Most small business owners operating from their home do not have the type of resources to deal with a significant increase in tax liabilities, fees and penalties which can result from following misleading and often outright lies regarding deductible expenses.