When “Creative” Tax Strategies Backfire
Throughout my professional career I have heard many interesting ways to lower the tax bill. However, sometimes the game of lowering taxes gets in the way of the real objective, which is to lower your taxes!
The IRS recently issued a reminder about social media scams that encourage people to claim deductions or exclude income in ways that simply do not work. The IRS also has a webpage dedicated to tax scam warning signs. Beyond these outright scams, there are many tricks that taxpayers deploy. These so called “tricks” increase audit exposure, cost money, and can result in steep penalties. Most importantly, they become a waste of your time and an unnecessary worry that hangs over your head.
The Value of a Deduction (what it is really worth)
A deduction is only as valuable as the taxpayer’s marginal tax rate. In 2025, a married couple filing jointly with taxable income of $300,000 falls in the 24 percent bracket. That means a $150 expense, if deductible, would reduce tax by only $36 ($150 × 0.24). When taxpayers try to force through a deduction that is not allowed, the benefit is far outweighed by the risk of disallowance, penalties, and interest.
What a $1,000 Deduction Is Worth
| Filing Status: Married Filing Jointly | Marginal Tax Rate | Tax Savings from $1,000 Deduction |
|---|---|---|
| Up to $23,850 | 10% | $100 |
| $23,850 – $96,950 | 12% | $120 |
| $96,950 – $206,700 | 22% | $220 |
| $206,700 – $394,600 | 24% | $240 |
| $394,600 – $501,050 | 32% | $320 |
| $501,050 – $751,600 | 35% | $350 |
| Over $751,600 | 37% | $370 |
Real World Example: When the Court Says No
In Sherman v. Commissioner, T.C. Memo. 2023-63 , the taxpayer, a physician, attempted to deduct extensive business expenses on Schedule C, including advertising, travel, meals, and other costs. The Tax Court denied many of these deductions because the taxpayer failed to provide credible substantiation and could not prove that the expenses were ordinary and necessary for the business. The court emphasized that taxpayers bear the burden of showing both proof of payment and a legitimate business purpose. The result was the disallowance of deductions, a tax deficiency, and accuracy related penalties. This case illustrates how even professionals with legitimate businesses can lose deductions if recordkeeping is weak or if personal and business costs are blurred.
Common Myths About Deductions and Income
Here are some myths I have heard along the way. Some with great conviction, others with a wink.
Clothing and Dry Cleaning
Claimed as: Schedule A (miscellaneous itemized deduction; however no longer applicable permanently with OBBBA)
Why disallowed: Clothing suitable for everyday wear is not deductible. The Fifth Circuit in Pevsner v. Commissioner, 628 F.2d 467 (5th Cir. 1980) (case summary) made this clear.
Personal Expenses Through a Company
Claimed as: Schedule C, Schedule E, Schedule F
Why disallowed: Expenses must be paid by the entity itself to be deductible. Lohrke v. Commissioner, 48 T.C. 679 (1967) clarified this rule.
For a practical discussion, see my article: Should Owners and Partners Pay Company Expenses Out of Pocket?
Home Office for W-2 Employees
Claimed as: Form 2106 or Schedule A (before 2018)
Why disallowed: Employee business expenses are not deductible after the TCJA. IRS Tax Tip 2022-10
Personal Expenses Through a Company
Claimed as: Form 1120, 1120-S, or 1065 (business entity return)
Why disallowed: When a company pays personal expenses for its owners and deducts them as business expenses, the IRS and courts will treat those payments as constructive dividends or wages, not deductible costs. In Luczaj & Associates, T.C. Memo. 2017-42, a corporation paid personal home utilities, swimming pool maintenance, and insurance premiums for its shareholders. The Tax Court disallowed the deductions, ruling that the payments were personal benefits and taxable to the owners.
Pets as guard dogs.
Claimed as: Schedule C, Schedule E, Schedule F
You may find this one supportable under the right circumstances. Household pets are personal, and their expenses are not deductible, unless the animal is a genuine business security asset. Isabelle Talkington, Can You Write off Your Farm or Ranch Dog on Your Taxes?, FarmRaise February 24, 2025 discusses the requirements for deducting pet related expenses.
Family Vacations and Conferences/ Weddings as Marketing
Claimed as: Schedule C, E, F or Form 1120, 1120-S, or 1065 (business entity return)
Why disallowed: Even if a portion of the trip has a business purpose, courts and the IRS require strict allocation between business and personal days, and adequate documentation. Under IRC § 274(d), taxpayers must prove amount, time, place, and business purpose of travel, meals, and lodging. Purely recreational portions are not deductible.
Leaving Off Side Gig Income
Claimed as: Omitting amounts from Schedule B, C, E
Why disallowed: All income is taxable unless specifically excluded by statute. Tax Court Upholds IRS Deficiency Determination Against Individual, T.C. Memo 20220104.
The IRS’s internal manual states that Information Return (IR) data from third parties is matched against taxpayer returns to identify discrepancies in income, deductions, or credits. This “match” drives audit selection or correspondence.
Gambling Losses and Winnings
Claimed as: Schedule A
Why disallowed: Gambling losses can only offset 90% of gambling winnings, and the taxpayer must maintain accurate records such as a contemporaneous diary or casino statements. Estimates and round numbers are not acceptable. In In Preben Norgaard v. Commissioner, 939 F.2d 874 (9th Cir. 1991),, the court rejected a taxpayer’s attempt to use a “bankroll method” and stacks of losing tickets to substantiate large losses. The lack of detailed records meant the deductions were denied.
Rounding and Mismatches
Another common error is reporting round numbers. A return showing $10,000 in supplies or $5,000 in telephone expense are obvious signs the expense is an estimate, and that actual records are not available. Similarly, when income or expenses do not match IRS reporting forms such as W2s, 1099s, or 1098s, the IRS system often automatically issues a notice.
The Smarter Approach
Tax savings come from planning, not pretending. In addition, tax planning takes a significantly less time and effort compared with creative tax arguments (Schooler v. Commissioner, T.C. Memo. 2022-26). The Internal Revenue Code offers real opportunities such as retirement plans, health savings accounts, business investments, capital and real estate investment, charitable strategies and education incentives. These tools can lower your tax bill without creating audit exposure.
Final Thought
Do not risk your financial future chasing deductions that will not survive an audit. I work with clients to minimize taxes using strategies that are legal, defensible, and effective. Schedule an appointment with me today to discuss how to structure your return for lasting savings, not fleeting tricks that the IRS has already seen.
