This post is rated PG (Public Guidance & Oversight for IRS Abuses).

The Inspector General’s report at this link documents the lack of financial safeguards and controls on the fraudulent use of credit cards by IRS employees. From purchasing pornography to $100 lunches, it’s a depressing read.

The irony is that, as tax advisers, we often warn clients that meals and entertainment (even though business related) may be disallowed if it is “lavish or extravagant” per IRS Regulation 1.274-1.  

I seem to remember that somewhere there is an “equal justice under law” concept in our country.

Just to make sure that we all understand the rules, I’ll attempt to summarize.

• A business owner using his own (earned) money for business entertainment may not get a deduction if (at IRS’s discretion) the expense is deemed to be lavish or extravagant.
• The IRS may use the taxpayer’s money for non-business AND lavish/extravagant items and neither the employer nor employee incurs any tax liability on the expense.
• In Washington’s mind this equates to “equal justice under law.” This makes perfect sense if you think like a politician instead of an entrepreneur.

What can you do? Let me offer two helpful ideas.

•  Here’s a link to your Congressman. You may want explain the “equal justice” concept to him via an email.
• Here’s a link to our firm guide on how to safely document your business meals and entertainment.  Follow this guide and you should survive any IRS examination.