Married Couple Improperly Deducted Self-Employment Tax

Posted on August 14, 2020

In a recent case before the United States Tax Court, a married couple who improperly deducted one-half of their alleged self-employment tax for two years was denied this deduction.  The husband was a Certified Public Accountant who ran an accounting firm with another partner.  His own accounting firm made payments to him every two weeks for the accounting services he provided to the partnership.  However, the husband was an employee of the accounting firm.  In addition to claiming a self-employment tax deduction, he also claimed business expenses that he paid while working for the accounting firm, again taking the position that he was self-employed.  He also claimed self-employed health insurance expenses and a self-employed simple IRA contribution deduction.  To claim self-employed deductions on your tax return, you truly have to be self-employed.  If you are self-employed, you can claim one-half of the self-employment tax as a deduction on your tax return along with business expense deduction, and self-employed health insurance expenses and simple IRA contribution deductions.  Because the husband was a W-2 employee of his own accounting firm and was not self-employed, the United States Tax Court rejected all of these deductions out of hand; the United States Tax Court also upheld the assessment of accuracy related payments, penalties and the underpayment of tax due to negligence and a substantial understatement penalty.  Here at IRS Trouble Solvers, we are surprised that the IRS did not propose to assert the fraud penalty against a Certified Public Accountant for taking such an absurd position on his tax returns for two years.

Have you claimed expenses on your tax returns to which you are not entitled?  Call us, we can help!  Chances are, the IRS will figure out that you are not entitled to these expenses and hit you with a huge tax bill, penalties and interest, including the fraud penalty!  The fraud penalty is not comprisable under an Offer in Compromise or dischargeable in a bankruptcy, so beware!

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