When it comes to audits, our friends at the IRS are interested in examining returns as accurately as possible. (No, they’re not just interested in squeezing out more tax, and some audits actually result in refunds.) So the folks in the Small Business/Self-Employed area have compiled a series of Audit Technique Guides to help examiners with insight into issues and accounting methods unique to specific industries. As the IRS explains, “ATGs explain industry-specific examination techniques and include common, as well as unique, industry issues, business practices and terminology. Guidance is also provided on the examination of income, interview techniques and evaluation of evidence.”

There are currently dozens of ATGs available. Some are straightforward and predictable, like attorneys, consultants, and child care providers. Others are more specialized or esoteric, like art galleries, cost segregation studies for real estate investors, and timber casualty losses. At one point, there were even two separate guides for Alaskan commercial fishing activities – one for the fishermen who catch the fish and another for the vendors who sell it. You can find all of them online – if you find yourself on the business end of an audit notice, reading your own industry’s guide is like taking a sneak peek at your opponent’s battle plan!

Naturally, the IRS wants to keep up with new challenges in new industries. And identity theft is one of those new industries playing a growing role in today’s electronic and online economy. Identity thieves pretend to be someone else to access resources or obtain credit and other benefits – like fraudulent tax refunds – in that person’s name. The problem is serious enough that the IRS has put identity theft at the top of its annual “dirty dozen” list of tax scams. And now, this year, the IRS has just issued an Audit Technique Guide for identity thieves.

You might be surprised that the IRS is publishing an audit guide for a clearly illegal business. But U.S. citizens are subject to tax on all worldwide income, from whatever source derived. The IRS really doesn’t care how you make your income – they just want their fair share. (Remember who finally nailed Al Capone?)

The good news is, there are plenty of legitimate deductions you can take to cut the tax on your spoils from identity theft. For example, you can deduct home office expenses if that’s where you phish for information. Your home office qualifies if you use it “exclusively and regularly for administrative or management activities of your trade or business” and “you have no other fixed location where you conduct substantial administrative or management activities of your trade or business.” To substantiate your deduction, keep a log and take photos to record your business use. It doesn’t have to be an entire room – you can claim any “separately identifiable” space you use for work. Rev. Proc. 2013-13 even offers an optional “safe harbor” method for deducting $5/foot for up to 300 square feet!

You can capitalize equipment like computers and printers that you use for hacking, or choose first-year expensing for faster deductions. You can also deduct day-to-day expenses, like internet access, utilities, and vehicle costs for driving to trash dumpsters to find personal information (mileage allowance or actual expenses). Some aggressive practitioners argue that you can even deduct business-related dry-cleaning expenses for “dumpster diving” outfits; however, there’s no formal authority for this position.

We’ll finish here with two important warnings. First, remember that identity theft is still a serious crime. If you’re caught, you can face crushing fines, serious jail time, or both. And second, be very careful with anything you read around April Fools’ Day!

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