Today I provided a consultation for a new client who had just been audited by the IRS. She is an artist, and a legitimate one at that. Her paintings sell. She sells $2,000-$3,000 worth of artwork per year. Not enough to travel the world, but enough to visit Disneyland (more on that later). Of course, she has to buy art supplies, take some classes, pay entree fees for the art shows, etc. – spending maybe $1,000-$1,500 each year. All of these costs are deductible business expenses, reducing her taxable income. In other words, we have a small business with $3,000 income minus $1,000 expenses, resulting in $2,000 taxable profit. Pretty clean, if you ask me.
Then why did the IRS have a problem with this lady? Because these were not the numbers reported on her tax return. See, the artist had a friend. We all have such friends. They know how stuff works, and they are nobody’s fools. That friend coached my client to “maximize” her tax benefits by claiming this and that, and then some more. And maximize he did. Now the newly enlightened artist had $30,000 of so-called business expenses (including, you guessed it, a Disneyland vacation, err, business trip) and a huge tax refund. This money came handy and was promptly spent. Shortly after, she also had an IRS audit. Now she has a minor inconvenience of owing the IRS almost $20,000 in back taxes and penalties for the two audited years.
Unfortunately, well-meaning ignorant friends have strong competition in the bad advice arena. It also comes from certain CPAs. And since these CPAs are not in the business of defending their clients (like I am) but in the very different business of selling books and subscription newsletters, their motives are suspect. It’s an open secret that the best way to sell information is to sell the information that people want to hear. Smokers want to see studies that smoking does not cause cancer. Taxpayers want to hear that they do not have to pay taxes. Good news sells better than good paintings.
Today also (interesting coincidence, isn’t it?) I received a newsletter from a nationally-known CPA whose declared mission is to educate folks about little-known tax loopholes. So far so good. I love loopholes as much as the next guy does. What’s his latest lesson in tax reduction? It’s terrific, people! Turns out I can deduct taking my entire family to Disneyland, as long as I also attend some business conference in Orlando the day after. Wow, ain’t it great to be that smart?
I’m not even talking about the logistics of attending a business conference during a family vacation. Confession: I was stupid enough to try it once (and not for tax deduction), many years ago, and I will not try it again. Let’s say you do trick your family into this awful idea. Is it tax-deductible then? Gimme a break! This CPA’s clumsy attempt to fit family visit to Disneyland into the IRS definition of business-related entertainment is so poorly executed and is so misguided – I’d say it’s bordering on malpractice. It’s not worth analyzing. It simply will not hold any water. Magic is fun, but it quickly dissipates once you exit Disneyland. Of course, why does this CPA care? He sells you his newsletter, he does not sign your tax return. And he wouldn’t sign it even if you pay him, because he knows very well that he will be penalized for taking such reckless position.
And you think you would be able to quote his article as your defense when the IRS comes knocking on your door? Dream on, my friend! You just visited Disneyland, so you’re no stranger to fairy tales. Just keep my number handy. You will need it soon.