The 10 wackiest tax write-offs

By Bankrate.com

Did you hear the one about the pot dealer's tax return? The New Yorker who claimed the whole city as a dependent? The exotic dancer who deducted . . . well . . . you know?

That's right, it's time once again for Bankrate's 10 craziest tax write-offs, presented as a shot of levity to help make filing your annual federal income-tax return a little less tedious.

In our first installment, taxpayers sought deductions for everything from ostrich breeding to sperm donations. In round two, doggy day care and a pimped-out Amish buggy led the list of questionable claims.

But this year's strange-but-true collection from certified public accountants around the country may be the most bizarre yet, not only for their sheer audacity but also for the few that managed to slide by the Internal Revenue Service.

Of course, it is no laughing matter to try to knowingly defraud Uncle Sam. Serious consequences await those who fail to file, falsely file, knowingly underreport or otherwise play fast and loose with their federal income-tax returns.

It's also just plain dumb. What, like the IRS doesn't know that deductions are the biggest temptation in the tax code?

"In my business, as the saying goes, 'Pigs get fed, hogs get slaughtered.' If you want to deduct something, just don't be overly aggressive with it. It's everything in moderation," advises Walt Hatter, a CPA at Hatter & Associates in Fort Worth, Texas.

"You want to look at your returns in the same way your physician looks at your heart rate -- you want it to be about the same all the time. When it starts moving around a lot, the IRS wants to see why. When you have big swings in income or big swings in deductions, the IRS likes to check to make sure you're still alive. They're going to come take your pulse, and you might get a full body probe."

To avoid that, uh, full body probe, it's best to steer clear of the following crazy tax tactics.

1. It went up in smoke

Hatter must have thought he was hallucinating when one of his clients, a criminal-defense attorney, referred a marijuana dealer to Hatter. The dealer was facing prison time for drug dealing and didn't want to be nailed for tax fraud as well.

"Because he was involved in an illegal business, he could not take any deductions, period," Hatter says. "The tax code is written where if you are engaged in something illegal, you have to recognize all of the income, and none of the deductions are recognized, even the cost of the product. It was quite an education on my part."

Hatter chuckles at his client's income statement, or lack thereof: "Let's just say he wasn't getting 1099s from his customers. He gave me a number, and we paid taxes on it. I had no basis for it because he dealt in cash."

2. No receipts from above

Putting a few bills into the church offering plate got one client of Virginia CPA James T. Campbell in a bind when the IRS asked for canceled checks or receipts to support his charitable deductions. Explaining why he had no such receipts, the taxpayer said he simply throws in cash "as the spirit moves me."

Campbell says the IRS agent paused to consider the taxpayer's response and then offered this advice: "I understand how the spirit can move you. So my advice to you is to always take your checkbook to church with you. When you feel the spirit coming on, just take out your checkbook and fill in any amount you think is right, whatever the spirit may dictate. It makes no difference how much you give, just as long as you have a copy of the canceled check.

"This way both the spirit and the IRS will be pleased."

3. Silence is golden -- and deductible

While we're on the subject of charitable deductions, Allyson Baumeister, a CPA at Sanford, Baumeister & Frazier in Fort Worth, recalls one prominent client who found a creative solution to a chronically noisy next-door neighbor: He bought the house, ripped it out of the ground and donated it to a local women's shelter. He then claimed the value of the house as a charitable deduction.

"The deduction was limited to a percentage of his income, but his income was such that that wasn't a problem. From what I recall, the IRS may have adjusted the value somewhat, but it did allow the deduction," Baumeister says.

Seems everything is bigger in Texas, even the charitable deductions.

4. He took Manhattan, the Bronx and Staten Island, too

When accounting software was in its infancy, a rookie CPA at Hunter Group of Fair Lawn, N.J., prepared a return for an individual with one small glitch: The software mistook the filer's address "New York, N.Y." for the name of a dependent.

The mistake went unnoticed by the firm and the client until one day they received a phone call from the IRS. The agent apologized that the deduction was being disqualified, even though, as the agent politely agreed, it might indeed be justified.

Continued: Prostitutes a business expense?

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