Abusive Home Based Businesses

If It Sounds Too Good to Be True ...

By Dr. John L. Stancil
Tax Analyst, WebTaxCenter.com

You probably get them in your e-mail boxes every day. Or a "friend" went to a seminar and learned about a fantastic business opportunity and wants to get you involved. You can do it from your computer while you relax at home. Get Rich Quick! As the old saying goes, "if it sounds too good to be true, it probably isn't." Today, there may be more to it than just losing your investment. If you become a part of these abusive home-based business you may find yourself in trouble with the IRS.

Abusive Tax Expenses

These home-based businesses are abusive because they manipulate and misinterpret the tax law. A frequent approach is telling you that being in this business will allow you do deduct most, if not all, of your personal expenses. Everyone is a potential client, so you can deduct travel to the house of a friend. You can deduct the cost of a meal consumed with him. You can pay family members for work around the house, such as cleaning the kitchen, mowing the grass, and the like because this is necessary to the operation of your business. You can deduct all my medical expenses because it is a benefit provided by your business and is therefore 100% deductible. WRONG! WRONG! WRONG! These are examples of some false information given by these promoters.

The IRS has listed five points that should be considered when faced with these abusive schemes:

1. Any investment scheme that claims to allow a deduction for normal living expenses should be highly suspect.
2. A business must truly exist prior to claiming expenses.
3. Expenses must be ordinary and necessary paid in carrying on a trade or business.
4. Personal family and living expenses are not deductible business expenses.
5. Forming an S-Corporation or other entity does not cause these expenses to be deductible.

But It's Too Late

If you are a victim of one of these schemes, you should be aware that the IRS and other Federal agencies aggressively and successfully prosecute promoters of these schemes. If you have participated in one of these schemes, you may have to repay taxes owed in addition to interest and penalties. In some cases, imprisonment and fines can also result.

At this point, you can take two actions. First, you should correct any improper income tax filings by filing a 1040X, Amended Return, for any tax year involved. By voluntarily coming forward, you will stop interest and penalties from accruing further. Also, the IRS is more likely to view your case more leniently if you come forward. Although not guaranteed, you could ask for a waiver of any penalties. However, the IRS will not waive any interest charges, so don't even ask. Second, you can report the promoter of the scheme to the proper authorities.

If you are involved in an abusive home-based business, this is a very complicated tax and legal issue. You should seek the advice of a competent CPA and attorney in an effort to minimize your liability. Additional tax information may be found at www.webtaxcenter.com or at www.irs.gov.

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Dr. John L. Stancil, a tax analyst for WebTaxCenter.com, has been a member of the Florida Southern College faculty since 1998. He received his bachelors degree from Mars Hill College and holds a M.B.A. from the University of Georgia. He later earned his doctorate in accounting from the University of Memphis. He holds four professional certifications, including CPA, CMA, CFM and CIA. Stancil has received the Florida Institute of CPAs 2005 Outstanding CPA in Public Service Award. (This award is given annually to a Florida CPA who has demonstrated significant contributions through community and civic activities.) He has also been recognized as the Expert of the Month on several occasions by allexperts.com.

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