Some Deductions Can Be Very Costly

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As the calendar turns from March to April, articles on “tax tips” and “hidden deductions” seem to be everywhere, and for good reason. The byzantine complexity of the IRS code prompts these articles and the volume of business to support many national tax preparation companies. Sadly, both the articles and the national tax preparation companies are often more interested in their self interest than the facts or a correctly filed return.

A common ruse used to increase refunds mentioned in articles and abused by national tax preparation companies is the deduction of one’s costs in engaging in their hobbies. In short, the hobby is listed as a legitimate business and claimed on Schedule C, all costs of engaging in the hobby are deducted against the taxpayer’s other income. Because there are higher deductions, the refund is higher too. Sounds great, right? Wrong. What the articles nor the national tax preparation companies will tell people is that these bogus Schedule C businesses are a huge red flag and often result in IRS review. The ultimate result is that the IRS sends a deficiency notice including interest and penalties that can far exceed the increase in your refund. Be wary of your tax preparer and of articles claiming to help you increase your refunds.

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