Abusive Home-Based Business Tax Scams Explained

Many types of tax scams are being committed by home-based business owners who misinterpret or try to manipulate IRS rules and other tax laws. The goal of using such tactics is to lessen the amount of taxable income that will be reflected in the business tax returns. The abusive tax schemes being committed by home-based businesses have become more rampant as there are fraudulent tax preparers who promote such techniques as a legal way of reducing payable taxes.

How Tax Scams Manipulate Tax Laws

The tax schemes used by unscrupulous owners of home-based businesses mainly involve the intentional or erroneous deduction of expenses that are not allowed under the law. Many abusive tax preparers and fraudulent promoters tell unsuspecting taxpayers that, with a home-based business, a business owner needs to simply keep an itemized record of all types of expenses incurred, including personal and family-related expenditures and charges, to legally cut back the total taxes to be paid.

Hence, it is not surprising that many taxpayers use the home-based business model so that they can claim business expenses even if they are, in fact, not into any kind of business. Also, there are business entities that try to appear as if they were home-based, thinking that deducting personal expenses and other family allowances along the way will be allowed in this case. In fact, many taxpayers have even established partnerships and corporations in the hope that having all the legal documents will make all their expenses deductible. There are many cases where the business entity itself is legitimate but becomes culpable under taxation laws when the owner intentionally or unintentionally includes personal or family allowances into the total deductions.

What Does the IRS Say?

Under the law, an entity can claim business expenses as deductions only if it clearly aims to do business and earn from it. In other words, the motive of making profits must be present. Otherwise an entity cannot be considered a business. Even so, a legitimate business entity has to prove that the expenses to be deducted from taxable income are all necessary and ordinary in the course of doing business. The law has laid down the requirements that need to be met before any expense can qualify as a tax deduction. Merely having a record and the receipts of all your expenses does not automatically turn such items into allowable deductions.

What You Can Do to Avoid Tax Scams

As a responsible owner of a home-based business, you should not participate in tax scams. If the IRS finds out about the fraudulent items in your business tax return, you will be prosecuted, required to pay all unpaid taxes plus interest and steep penalties, and you could even be sent to jail. Do not buy into schemes claiming that you can deduct all sorts of expenses from your home-based business. Personal and family expenses are not allowed as deductions.

Finally, always remember that even if you hire a tax preparer, your income tax return will still be your sole responsibility. So, make sure to correct your tax returns if you think that there are any mistakes.