top of page



I had quite the interesting predicament this year. One of my clients was this couple, let’s call them Brad and Angelina. (No, I’m not referring to Brad Pitt and Angelina Jolie!) Brad and Angelina live in the heart of New York City and have been my clients for years. Last year they came to me, but their return was a little different than the previous years. Both Brad and Angelina now had sole proprietorship businesses that each had $400,000 in income, and almost exactly $400,000 in expenses. Brad’s business had a $10 profit, and Angelina’s business had a $15 loss.

As a Certified Public Accountant for 30 years, this definitely raised some flags for me. Not only did they have a business with $400,000 in income and almost exactly $400,000 in expenses, they had two of them. Another flag was that neither of them mentioned anything about the new businesses during the year or the previous year. The businesses seemed to appear out of thin-air. But wait, there’s more. The cherry on top was that they brought this information to me on two already filled out tax forms. All of this warranted some explanation.

I chose to send the client questionnaires that I developed, that would describe their businesses to me, in writing, and give me some general background on the businesses. However, the client was dodgy, confirming my suspicions that something was amiss. After repeated inquiries, I got to the bottom of the issue.

There was some internet marketing website pushing some vague skin cream product, and Brad and Angelina were lending their names and social security numbers to this company. In return they each received a check for $1,250, totaling $2,500 per year for the married couple.

If this thing blew up Brad and Angelina could end up paying upwards of $100,000 in legal fees to defend themselves against criminal charges of money laundering. The other problem that concerned me was that these two businesses, with $400,000 each neatly coming in and going out, could be classified by the IRS (at their option) as hobbies, since they have no real profit potential.

If the IRS chooses to classify these activities as hobbies, rather than businesses, they will accept all the income as exactly that amount of taxable income, and disallow ALL of the expenses, even though they can be 100% proven.

This would result in a massive tax increase with penalties and interest, on the Federal, State, and Local levels.

I urged them to get out of this shady-at-best business right away, as they already had two full-time W-2 jobs aside from these new businesses.

Clients don’t get into these scenarios often, but if you’re a tax preparer you should beware of IRS hobby loss rules, do your due diligence and ask questions when something does not seem right to you.

Copyright 2017 Tax Strategies, Inc. Robert Greene CPA CMA

bottom of page