How to Handle an IRS Audit
By John Alan Cohan, Attorney at Law

Excessive business deductions by owners and breeders of horses, livestock or general farmers--or in other businesses activities-- can be a red flag that triggers IRS audits.... click for more

An area of concern in IRS audits of farming, livestock and horse activities is the amount of time expended by the taxpayer in the activity.

A recurring problem is that taxpayers do not keep contemporaneous time records, but instead “reconstruct” time records in the face of an audit.  This can always be a hurdle because it suggests that you did not really conduct the activity in a businesslike manner, but instead simply prepared self-serving records after the fact, and only because the IRS has indicated its intention to conduct an audit.... click for more

I have been asked to comment on what appears to be an upsurge in audits by the I.R.S. with respect to startup horse and farming activities.  During the past few years there has been an unusually high number of taxpayers in the early startup phase of their activity being subjected to audits.  Is this a trend?  Is there some reason for this?  Is it simply a coincidence? ... click for more

Since 2000, the IRS has nearly tripled the number of audits of tax returns filed by people making $25,000 to $100,000.  Kevin Brown, the IRS deputy commissioner, stated that this is an effort to run a “balanced audit program”.  Last year the number of audits in this category was approximately 436,000, up from about 147,000 returns in 2000... click for more

Some people are unlucky enough to get audited on multiple occasions.  Austin Mitchell’s family has owned and operated a farm in Salem, Missouri, for over 100 years.  Mr. Mitchell is also a lawyer and CPA.  He grew up on the farm, and returned to live there in 1991 when his mother took ill.  After her death, he inherited the farm and continued living there and managing it.  The farm has had prodigious corn harvests, and trees in various stages of maturity that are sold for lumber.  Mr. Mitchell also sought to make money with haying. ... click for more

Richard Kaehn of Kampton Pennsylvania, worked as a cargo pilot.  He and his wife decided to purchase a farm to supplement his income and to provide income after his retirement.  He ended up contesting an IRS deficiency in Tax Court, and lost.  [Kaehn v. Commissioner, 54 TCM 1293, T.C. Memo. 1987-608.] ... click for more

An area of concern for people in the horse, livestock and farming industries--among many other fields--is how to withstand IRS scrutiny in the event of an audit. 

In judging whether you are engaged in a business rather than a hobby, one element is whether you have consulted experts so as to determine if the activity is conducted in accordance with IRS Regulations.... click for more

Many years ago a federal court defined the word “profit” as “the advantage or gain resulting from the investment of capital, or the acquisition of money beyond the amount expended; a pecuniary gain.”  The meaning of “profit” is important not only in computing tax liability, but in determining a taxpayer’s motive for entering into a transaction, or establishing a livestock or other farming business.  click for more