Did you hear the one about the ostrich? The sperm donor? The dog food?
They’re just three of the more ingenious tax deductions that creative Americans have devised over the years to counterpunch the tax collector. A quick Ali shuffle, a feint with the left and an outlandish deduction delivered with a straight face can take the sting out of the annual tax beating — at least until the Internal Revenue Service catches on.
Taxes, of course, are no laughing matter. Serious consequences await those who fail to file, falsely file, knowingly underreport or otherwise throw spitballs at the system. Just ask Willie Nelson, who lost the best little golf course in Texas to back taxes.
Still, every year Americans try to shave what they owe on their personal income tax returns by pushing the envelope and letting their certified public accountant make the line calls.
"If you’re going to be aggressive, deductions are where you’re going to do it. You’re not going to do it in the area of income; you want to report all your income," says Frank Howard, CPA and principal of Howard and Waltrip in Dallas. "I go ahead and apply the smell test. Most of the time, they’re just throwing everything up against the wall to see if it sticks."
Old argument invalidated
As any accountant will tell you, the rewards of cheating on your taxes are never worth the risk. And even if you find a tax pro willing to push the limits, the Treasury Department says when it comes to "potentially abusive" tax moves, the old "my tax adviser said it was OK" argument will no longer work.
"We are raising the stakes for taxpayers who fail to disclose potentially abusive transactions to the IRS," stated Treasury Assistant Secretary for Tax Policy Pam Olson in announcing the tougher rule. "Too many tax advisers have counseled clients against disclosing their transactions with the expectation that the advisers’ opinions will allow the clients to avoid penalties."
By removing that argument, tax officials now believe taxpayers’ risk-to-reward calculations will be more judicious, eliminating what Olson describes as "inappropriate tax-avoidance transactions."
Still, it’s a good bet that as the April deadline approaches, many taxpayers will do — or at least try — the darndest things. Here are nine of the funniest, though not recommended, tax-trimming attempts that clients have taken to CPAs across the country.
My son, my dog
Disc jockeys typically don’t make much money and save even less. A few years ago, one approached Wyoming CPA Mike Lovelett for some free advice.
"I’ve got this problem, and I’m really starting to get nervous about it," the DJ said. "Several years ago, I was going to owe some tax, so I put an extra deduction on my tax return."
Well, reasoned Lovelett, managing director of Lovelett, Skogen & Associates in Casper, it couldn’t be that bad. Then the DJ explained: "I put my dog on as a dependent." The radio personality had deducted his dog Red all these years, allowing him to escape owing the IRS on those particular returns.
But, unfortunately for the DJ and all other pet owners, claiming a dog or cat or any other furry family member is definitely disallowed by the tax laws.
Sex and the city
Then there was the client who approached Manhattan CPA Marc Albaum about a very personal tax matter. "He had made some money being a sperm donor and wanted to know if he could take a depletion allowance," Albaum recalls. "I told him he really needed to be an oil well or something like that."
Playing with fire
Herb Wakeford, a CPA in Raleigh, N.C., recalls a Pittsburgh furniture-store owner who, after years of trying unsuccessfully to sell his business, hired an arsonist to torch the place. The insurance company paid off to the tune of $500,000, which the owner dutifully reported on his income tax return. However, along with taking the proper deductions for the building, its contents and the usual business expenses, he also deducted a $10,000 "consulting fee" he had paid the arsonist. An IRS audit two years later landed them both in jail. The IRS disallowed the "consulting fee" and slapped on $6,500 in additional taxes, penalties and interest.
What, not the Barcalounger?
Then there was the client who insisted on deducting the cost of his television and cable service, against his accountant’s advice. "His reasoning was that he was a Spanish teacher at school, and the only reason he bought the TV and had the cable was for the Spanish channels so he could be able to teach his students better," Howard says. "I told him, ‘Well now, not too many people out there can deduct the cost of their TV and cable, but if you can get away with it, knock yourself out.’"
Fun with livestock, part I
Back when the Society of Louisiana CPAs manned a tax hot line, few inquiries stumped them. But Al Suffrin, SLCPA’s communications and public relations director, recalls one that did: "We took a call from an ostrich farmer in St. Tammany Parish who called in to find out how to go about depreciating an ostrich," he says. Strange as it sounds, you can depreciate an ostrich or any other livestock, as long as it’s used for breeding.
Fun with livestock, part II
Which brings us to the tale of the crusty old Texas rancher who insisted upon accompanying his CPA, Raymond Lott of Lott, Vernon & Company of Killeen, to the rancher’s first tax audit. When the rancher’s tax depreciation schedule listed 15 or 20 animals as breeding stock, the no-nonsense young IRS agent challenged the old cowboy. "I presume you breed these animals?" she asked pointedly. Without hesitation, the rancher replied, "Nope," sending his CPA into mild tachycardia. After a sufficient pause, the rancher finished the popular Texas joke, "I’ve got a bull for that."
There was a time when deductions were as plentiful as dinner mints. "Many years ago when I was a young clerk, a local CPA kept a very large glass bowl filled with receipts in his office," says Nancy Reynolds of Reynolds & Associates in Naples, Fla. "If a client came in and was a little shy of deductions, they merely dipped into the bowl and helped themselves to some of those glorious deductions."
Sic him, Fido
Sometimes deductions seem so logical they just have to be legal.
"I had a guy come in one time wanting to know if he could deduct the cost of his dog food. His reasoning was that his dog was security for his house, therefore the dog food became a security expense," Howard says.
"I kind of liked that one. The IRS loves that stuff."
He works in mysterious ways
And when all other loopholes seem closed, sometimes only a higher power can help.
One fine February, a rookie tax accountant completed a slam-dunk return for one of the firm’s old and trusted clients and turned it in to his boss, says Mary Anne Petesch, a CPA with Hagen Kurth Perman and Co. of Seattle. There followed several loud whoops of laughter from the partner’s office.
It seems the client had accidentally lost his dentures when they fell in the toilet and had claimed them on his taxes as an act-of-God casualty loss.