Avoid IRS Penalties in 2010 By Keeping Good Record of Business Expenses

As taxpayers are getting ready to file their 2010 tax returns, an important thing to remember is to only claim deductions that you can substantiate with evidence. This is an easy way to avoid incurring the wrath of the IRS–do not deduct “business” expenses that are personal!

I have blogged about many cases before where individuals were subjected to IRS penalties for falsely claiming business expenses as a part of their deductions. When requested to bring evidence to support these deductions, these individuals were unable to produce them.

Remember, if the IRS suspects you of falsely claiming tax deductions, you are guilty till proven innocent. This means if you do not have the documents to back up your deductions, you are guilty and will be slammed with IRS penalties–whether or not the deductions were actually legitimate. So don’t make the mistake of being slammed by IRS penalties simply because you threw away your records.

Just recently a couple was penalized for claiming false business expenses because they had incorporated their insurance business as a method of tax-evasion.

CCH (http://intelliconnect.cch.com) reports:

Couple’s Claimed Business Expenses Were for Tax Avoidance, Penalty Imposed

A married couple could not deduct expenses they claimed from the husband’s insurance business for the years in issue because they failed to prove that the payments were ordinary and necessary expenses in carrying on a trade or business. Their testimonies that the payments made to their daughters were for services rendered to the business and that other payments made were for furtherance of the business were self-serving. Their documentary evidence did not have any economic reality beyond tax planning.

The creation and incorporation of the purported insurance business was for tax-avoidance. The claimed expenses for wages, rent, management services and other expense, were not for rendered services or connected with their insurance business, but were actually payments of the couple’s nondeductible personal living expenses and for their personal residence expenses. To bolster the chances that they would succeed in achieving their tax-avoidance objective, they created a fictitious paper trail that included a purported management consultant agreement, a purported employment agreement, a purported medical and dental reimbursement plan, purported real estate installment documents, a purported educational assistance plan document and a purported automobile installment sale agreement.

The taxpayers were liable for the accuracy-related penalty for the years in issue because they substantially understated their tax by claiming deductions to which they were not entitled. The taxpayers failed to carry their burden of establishing that there was reasonable cause for and that they acted in good faith with respect to any portion of the understatement of tax.

Don’t start off 2010 with new IRS problems. Avoid IRS penalties by making sure that your information is accurate and truthful on your tax returns. Always keep a careful record of your business expenses so that you can back up your tax return if the IRS requests evidence.

Tax Resolution Services is a team of tax attorneys, Certified Tax Resolution Specialists, and CPAs who are here to offer your tax help. You can call our office today at 1-866-477-7762 for a free tax resolution consultation or visit www.taxresolution.com.

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