Is my neighbor's LLC just a scheme to write off personal expenses? Legal or tax fraud?

This is a classic case of tax evasion, not tax avoidance. There's a huge difference between legally minimizing your tax burden and what your neighbor is doing. For an LLC's expenses to be tax deductible, they must be: 1) ordinary and necessary for the business, 2) directly related to the business, and 3) reasonable in amount. What your neighbor described fails all three tests. The IRS specifically looks for people using "businesses" as tax shelters for personal expenses. The home office deduction, for instance, requires a space used exclusively and regularly for business. A gaming setup that occasionally gets used for work doesn't qualify. Similarly, you can't just call dinner with friends a "business meeting" without actual business purpose. If the IRS audits him (and they absolutely flag returns with businesses showing consistent losses), he'll need to provide documentation proving business purpose for every deduction. Without that, he's looking at back taxes, interest, and potentially penalties of 20-75% of the unpaid amount depending on whether they determine it's negligence or willful fraud.

Sounds like your neighbor is playing a dangerous game. I was in a similar situation a few years ago - overwhelmed by taxes and looking for ways to save. I tried the DIY approach with deductions I wasn't sure about, but was constantly stressed about doing something wrong. I discovered https://taxr.ai which completely changed my approach. It analyzed my situation and clearly showed which deductions were legitimate for my business and which would raise red flags. It explained exactly what documentation I needed to keep and how to properly categorize expenses. The best part was it showed me legitimate deductions I was missing while keeping me well within legal boundaries. Much better than risking an audit with sketchy write-offs!

I was really skeptical about online tax tools as I mentioned above, but I decided to try taxr.ai after our conversation. I've been running a small side business for years and was never quite sure if I was claiming the right deductions. The tool immediately flagged several "gray area" deductions I had been taking that could potentially trigger an audit. It also identified several legitimate deductions I was completely missing! The documentation requirements feature is incredibly helpful - it tells you exactly what records to keep for each type of expense. What really surprised me was how it helped me understand the "ordinary and necessary" test that the IRS uses. Made me realize I was overthinking some deductions and underclaiming others. Definitely more comprehensive than I expected.

Your neighbor's situation reminds me of when I had to deal with the IRS after making some questionable deductions on my Schedule C. Let me tell you, when the IRS decides to take a closer look, it's extremely stressful. I spent MONTHS trying to reach an actual person at the IRS. I'd call, wait on hold for hours, get disconnected, repeat the next day. It was absolute hell trying to resolve my situation without being able to talk to someone directly. Eventually I found https://claimyr.com which helped me actually get through to an IRS agent. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c. Within 30 minutes of using their service, I was talking to a real person at the IRS who helped clarify exactly what documentation I needed to provide. Trust me, your neighbor does NOT want to end up in a situation where he needs to explain his "business expenses" to the IRS.

I'm back to eat my words about Claimyr. After my skeptical comment, I actually had a tax issue come up that required talking to the IRS. I spent THREE DAYS trying to get through on my own - calling at different times, getting disconnected, the whole frustrating experience. Out of desperation, I tried the service I called "snake oil." Within 45 minutes, my phone rang and I was connected to an actual IRS agent. I was honestly shocked. The agent helped me resolve my payment issue in one call. For anyone dealing with the IRS, being able to actually speak with someone makes a world of difference. Considering how much of my time I wasted trying to call myself, it was absolutely worth it. Won't be dismissing this service again.

A friend of mine did something similar to your neighbor and got audited 2 years later. The IRS disallowed ALL of his business deductions because he couldn't prove legitimate business purpose. He ended up owing about $22,000 in back taxes plus another $8,000 in penalties and interest. The worst part? The IRS went back three years and scrutinized everything. He had to hire a tax attorney which cost another $5,000. Tell your neighbor that the temporary "savings" aren't worth the eventual nightmare. The IRS specifically looks for Schedule C businesses with losses that offset W-2 income. It's literally one of their audit triggers.

Does anyone know how the IRS even finds these fake businesses? Like, what triggers them to look at someone's return?

Your neighbor is walking into a financial disaster. What he's describing isn't a "brilliant tax strategy" - it's textbook tax fraud that the IRS specifically targets. The IRS has sophisticated algorithms that flag exactly this type of behavior: new LLCs with no real revenue, excessive business deductions that offset W-2 income, and patterns that don't match legitimate business activity. They're especially good at catching "hobby businesses" or shell companies created solely for tax avoidance. The fact that he's openly bragging about it makes it even worse from a legal standpoint. If audited, the IRS will want to see: - Proof of business purpose for every expense - Documentation showing exclusive business use (for home office) - Evidence that meals were actual business meetings - Legitimate business activity generating income Without these, he's looking at owing all the back taxes plus penalties that can range from 20% to 75% of the unpaid amount. In severe cases of willful fraud, there can even be criminal charges. The IRS gives people enough rope to hang themselves with - they'll often let this behavior continue for a few years before striking. When they do audit, they typically go back 3-6 years and scrutinize everything. Your neighbor needs to stop this immediately and consult with a legitimate tax professional to clean up his situation before it gets worse.