IRS Warns Over Bogus Home-Based Business Tax Schemes

by Mike Godfrey, Tax-News.com, Washington

11 February 2002

The US Internal Revenue Service last week issued a warning regarding bogus home-based business tax relief schemes.

According to the IRS, promoters of these schemes claim that by establishing a bogus home-based business, taxpayers can claim most or all of their personal expenses as business expenses, which are eligible for deductions. However, this is not the case, as IRS Commissioner Charles Rossotti was at pains to point out:

'Each year, taxpayers reasonably search for deductions that will reduce the amount they owe. But they should resist the temptation of quick and easy schemes,' he cautioned, adding that: 'Creating a bogus home business or other schemes cross the line and puts the taxpayer on a path that will result in paying interest and penalties on top of the taxes they owe.'

According to Commissioner Rossotti, under the auspices of such schemes, taxpayers have variously attempted to deduct the costs of operating a personal residence by placing business related items throughout the house, deduct as business expenses salaries paid to dependents for services such as answering telephones and washing cars, claim for education expenses, and deduct personal furniture, equipment and entertainment expenses.

The IRS takes a dim view of US citizens attempting to claim for what would normally be considered as personal expenses without a clear business purpose and profit motive behind the home enterprise. However, taxpayers who have claimed such deductions on their tax return but would now like to file an amended return may be given the opportunity to do so, according to the tax authority.

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