Excessive itemized deductions

[Black Bart]

My (possible) new client's last year's return claimed almost $50K Schedule A expenses (mostly mileage) which were $5K more than income (had W-2 construction wages only). My view is that this amount (and it exceeding income) almost screams "Audit me!" This year's figures will be roughly the same.

What's the largest total of itemized deductions that you have ever claimed? This individual is going into business and would become a good, long-term, steady and profitable client. Would you consider doing this to latch onto his other future business?

[S T]

I have had

BB,

I can only share

I had/maybe still have a client "similar" in the high mileage on a W-2 Construction Worker - suppose to be temporary job, or job to job sight and it became really iffy, so for 2008 and 2009, sent over some rules and regulations and sites (which are on the board). And just told the client I needed the "logs" and what the outcome might or could be.

However, my client's mileage deduction and expenses did not exceed the W2 income, the Schedule A via 2106 was extremely high (and uncomfortable for me) so I just implemented additional recording keeping prior to completeing the tax return.

Thinking you might need more documented info from the client, prior to completing the return so you can make a "professional interpretation". and possibly a longer "conversation" with the client.

My 2 cents worth,

Sandy

[erchess]

Echo Sandy

I would tell the client that for every dime deducted on a return I prepared for him I would need a reciept and a note of the business purpose. For expenses incurred starting the day he gets my letter the note of business purpose is to be written the same day and dated but he may go back and use his memory to write notes for previous expenditures. I would tell him that it is mltn he will lose the earlier deductions if audited and that I judged it mnltn he would be audited.

Oh I would also need a believable story for how his expenses exceed his income. I actually do have one client whose expenses do exceed his income but A he is taking concrete steps to reverse this and B he got help from friends and family and I have seen the deposit slips with contemporaneous notes of who they came from.

[S T]

I should add

My client that was "iffy" for his deductins and mileage, I suggested that he contact his employer and request a "reimbursement plan" on his mileage, hoping to stave off the filing of form 2106.

But as I have siad, I have yet to prepare his 2009 tax return

Sandy

[JG EA]

Sometimes the high mileage and other business expenses of sales persons on a W-2 are very high. Then AMT kicks in for my clients at this point. They still benefit from these high numbers but it is much better for them if their company reimburses them.

[BOB W]

Sometimes the high mileage and other business expenses of sales persons on a W-2 are very high. Then AMT kicks in for my clients at this point. They still benefit from these high numbers but it is much better for them if their company reimburses them.

I tried that with one of my clients but his company refused to reduce his gross W-2 under an accountable plan. So his AMT continues and so does his odds of audit.

[Black Bart]

AMT also kicked in for my client -- cost about $1,000. Still, I'm interested in whether or not anybody has ever had a client whose itemized deductions exceeded their income in a normal, full work year. I have not that I can recall.

[Bees Knees]

Itemized deductions in excess of income are really not much different than Schedule C deductions in excess of income. It can happen, but usually for a Schedule C business, you suspect there is unreported income. For a W-2 / Schedule A activity where the deductions come from mileage, I suspect the miles are overly exaggerated. I would insist on a log book, and go over the rules on business verses commuting miles with the client. Usually construction workers believe they can deduct all miles when in fact, much of it is simply commuting miles. Temporary work locations are deductible only if there is a regular place of business. If there is no regular place of business, temporary work location miles are non-deductible commuting miles.

Also keep in mind the standard mileage method allows you to deduct more than what was actually spent. If the standard mileage rate is 50 cents a mile, but manage to somehow drive a car that only costs 30 cents a mile, you get 20 cents a mile for a deduction you never spent. Multiply that by 50,000 miles and that is $10,000 worth of deductions for money never spent.

[Black Bart]

Large itemized deductions

Itemized deductions in excess of income are really not much different than Schedule C deductions in excess of income. It can happen, but usually for a Schedule C business, you suspect there is unreported income. For a W-2 / Schedule A activity where the deductions come from mileage, I suspect the miles are overly exaggerated. I would insist on a log book, and go over the rules on business verses commuting miles with the client. Usually construction workers believe they can deduct all miles when in fact, much of it is simply commuting miles. Temporary work locations are deductible only if there is a regular place of business. If there is no regular place of business, temporary work location miles are non-deductible commuting miles.

Also keep in mind the standard mileage method allows you to deduct more than what was actually spent. If the standard mileage rate is 50 cents a mile, but manage to somehow drive a car that only costs 30 cents a mile, you get 20 cents a mile for a deduction you never spent. Multiply that by 50,000 miles and that is $10,000 worth of deductions for money never spent.

Thanks; good points all -- some apply, some don't:
Unreported income: No, I'm pretty sure that W-2 is all the income.
Exaggerated miles: No, he travels out-of-state to the same place every week and the distance is spot on.
Log book: Does not have one, but I would insist next time.
Commuting miles: This is the fly in the soup. Spouse says he's been with the same one company in the same one place for several years -- rents apartment, works five days, comes home every weekend, so I think the out-of-state job site is his tax home. While I've only seen the '08 return, I suspect the former preparer has been writing off these commuting miles for years and hasn't a clue about "tax home."
SMR versus actual expense: Yeah, I thought of this; that the standard mileage rate isn't a "real" expense and can be far above actual dollars spent. He's using SMR to cut taxes substantially more than actual expenses would and is "making money" overall even though his taxable income is a minus figure.

I'm thinking he's never been checked and taxpayers usually equate that with "legal." I haven't discussed it with him yet, but he will probably want to continue on with it which will force me to cut him loose.

But, "tax home" aside, it just seems that $45K income and $50K travel would interest IRS at first glance. I know it happens occasionally under special circumstances, but not for most people in an ordinary work year. It seems that IRS does not check this type of thing as much as you would think (although I'm not going to do this one and find out the hard way) .

[WhiteOleander]

Not to comment on your case specifically, but our office has seen a large increase in 2106 audits. Some mail audits and some in person audits. Perhaps 7-8 in the last couple of years when we hadn't had any before. I think the IRS is starting to scrutinize these returns.

[David1980]

How many miles were reported last year on his tax return as commuting miles? One thing I've been able to do is add all the miles reported for everything for the prior years of a vehicle and ask "So it looks like we've deducted 100,000 miles so far on that vehicle. What's the odometer read?" and get a reality check to the taxpayer that way (for example, if the odometer only reads 50,000 but he's reported driving 100,000 it might click that his guesstimates were off...)

That only works for exaggerated miles though, not for misclassified commuting miles.

[Bees Knees]

Commuting miles: This is the fly in the soup. Spouse says he's been with the same one company in the same one place for several years -- rents apartment, works five days, comes home every weekend, so I think the out-of-state job site is his tax home. While I've only seen the '08 return, I suspect the former preparer has been writing off these commuting miles for years and hasn't a clue about "tax home."

I think this is your key issue. Any assignment expected to last more than one year is not temporary. It is irrelevant how far the commute is. It is non-deductible, even if you have to drive half way around the world to get to work.

I’d really focus on that point with him and let him know the courts throw those kinds of deductions out every time.

[Black Bart]

To refine it

I think this is your key issue. Any assignment expected to last more than one year is not temporary. It is irrelevant how far the commute is. It is non-deductible, even if you have to drive half way around the world to get to work...

down and scrutinize it a little closer, what about this?:

Although he works for the same company all the time, that company continually moves around from one job to another inside the same city and the nearby surrounding metropolitan area. Assuming each job takes less than a year to complete and then they move to another site, would each job be considered a different "assignment" - and therefore be regarded as temporary?

Or would the fact that the company really doesn't "go" anywhere except maybe down the street kill the deal? The company would probably be working for a different customer, so it would be a "new assignment" to them -- not sure about what that does for my guy.

[Bees Knees]

Each job site would be considered “temporary,” if each is less than a year. However, the tax home issue still applies. Where is the general tax home? If the taxpayer is always working in that city, then that city is the tax home, even if his family lives in another town. Out of town travel only applies when the taxpayer travels away from his tax home to work. At best, he might get mileage from his apartment to a job site, but not from his family’s home to the job site.

[Black Bart]

Yeah,

Each job site would be considered “temporary,” if each is less than a year. However, the tax home issue still applies. Where is the general tax home? If the taxpayer is always working in that city, then that city is the tax home, even if his family lives in another town. Out of town travel only applies when the taxpayer travels away from his tax home to work. At best, he might get mileage from his apartment to a job site, but not from his family’s home to the job site.

all true. His tax home is in the big city, so miles from apartment to the job site are nothing worth considering and I guess it's a dead issue.

Come to think of it, even if it was otherwise, as I understand the rules he'd still only be allowed one trip per year from his real home in Dogpatch to the job in Metropolis and one trip back because all those weekend trips back home are for personal reasons and have no business purpose.