Nothing gets a taxpayer in deep trouble more easily than claiming inaccurate deductions. The IRS is ever vigilant in finding cases of deductions that are overstated. The objective behind IRS tax preparer certification is eliminating causes of underreported taxable income. One of the common ways this occurs is when business net profit is reduced by illegitimate deductions.

This is why the IRS scrutinizes businesses for substantiation of deductible expenses. In fact, the tax preparer exam consists of an entire second test devoted to tax reporting of business interests.

All ordinary and necessary business expenses are tax-deductible. That includes just about anything that helps a proprietor earn income for the business operation. Only a few things are specifically not tax-deductible. An individual who learns to become a tax preparer knows to not deduct traffic tickets, bribes paid to public officials, a home telephone line, and clothing for work that is not a uniform.

In most cases, an ordinary and necessary business expense is obvious. Court decisions have confirmed that ordinary expenses are those that are commonly accepted for a particular industry. Necessary expenses are those that have an appropriate connection to helping the business succeed.

The courts have also provided guidance for any Registered Tax Return Preparer about disallowed extravagant expenses. For example, private jets may be standard practice for some firms in certain industries. But this doesn't mean that every business owner can deduct private jet expenses for flying all over the country.

Deductions become tricky in cases where there is an overlap of business and personal purposes. There are several important tax preparer jobs involving business deductions. These include determining the non-deductible personal components in such expense categories as travel and business use of a vehicle.

The top concern of the IRS when auditing business expenses is claims for deduction of personal expenditures. Another area that is scrutinized is business dealings with relatives. Business owners should keep detailed records of all transactions, particularly those involving related parties. Any payments to relatives should consist of market prices for legitimate services. The IRS doesn't allow businesses to function as tax-deductible wealth transfer mechanisms to family members.

IRS Circular 230 Disclosure

Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.