Last month, a young lady came into our office asking for assistance with an audit. She went to her original tax preparer, but he wasn't available to help her, as apparently too many of his other clients were in a similar situation. When I looked over her deductions, it wasn't hard to see why.
On a printout titled "Actor-Related Expenses" were many deductions that the IRS does not allow. I was shocked, yet there they were, in black and white, purporting to be valid, allowable expenses. For example, her preparer had listed "Hair Cuts and Treatments." She had put down $1,550. But it's not deductible. Then there was "Manicures and Pedicures," where she'd listed $450. Not deductible. Under "Makeup," she put down $600. Not deductible (at least not entirely; $150 for a photo shoot qualified).
Under "Audition Clothing and Other Costumes," she'd written in $1,575. I asked if these were in fact costumes. Could they be worn on the street? She said they were audition clothes she would never wear on the street, but "I suppose they could be worn by someone if they wanted to." Then they're not deductible. Another line was for "Gym and Other Workout Expenses." She'd written in $450. Not deductible.
Wait a minute, you say. These sound like reasonable expenses. Why aren't they valid? Simple. All the above expenses aren't deductible because everyone has them. The success of every business professional is just as dependent on personal appearance as that of an actor.
Adding them up, we're already at $4,500 in expenses the auditor can throw out before even looking at the receipts. But it isn't over. Her tax preparer didn't ask what percentage of her cell-phone or DSL-line usage was for business; instead, he used the entire amounts. She'll lose part of those costs too. Under "Parking," she had written in $1,050. Although she told her tax guy that figure was for parking at her regular job, he still allowed it as a business expense on her return. Wrong. Parking for job-search activities—such as auditions and meetings with your agent or other industry professionals—is allowed, but you can't write off the cost of parking for normal, everyday work.
Her preparer asked her to "estimate" her business mileage for her car and then created a "total mileage" number on his own. But using her repair receipts, which included odometer readings, we determined her actual total miles for the year. It was only slightly higher than the business mileage she'd made up. No help there. Further, although she told her preparer she was buying the car, he decided to claim that she was leasing it, and together they made up expenses for gas and insurance. That's another $3,000 she'll lose.
The worst part of all this is making up numbers when she could have calculated the real ones from her receipts. She doubted the legitimacy of the process even then, but her preparer kept telling her, "As long as the numbers are close, you're fine. No one gets audited, so don't worry about it." Apparently, he too is learning that isn't the case.
But she signed the return, so she's ultimately the one responsible. Sure, she got a great refund, but she spent it two years ago. Now it appears she will be paying back more than $2,000 (plus interest), and she doesn't have the money or a job. That's a problem, but she's even more worried about the IRS looking at her 2006 return. She doesn't have any receipts for that year.
Remember two things: Don't improvise on your taxes, and if it sounds too easy to be true, it usually is.