Most individuals who fail to file tax returns, or underreport income or take inflated tax deductions may end up being assessed a “fraud” penalty, which enhances the tax liability but does not proceed into the criminal arena.
The case was Garbini v. Commissioner IRS. Mr. Garbini, of Myrtle Creek, Oregon, listed his occupation as a rancher, and his wife indicated she was a housewife. Both taxpayers were retired during the two taxable years in issue, and for Mr. Garbini this was a full time venture.
Sometimes a farm, livestock or horse activity may be closely connected to one’s principal occupation, with certain tax advantages. If two activities are treated as one, deductions and income from each activity can be aggregated in deciding whether the taxpayer has the requisite profit motive under the IRS hobby loss rule.
Wheat is an amazing crop…which is why we grow it in Oklahoma. Given the slightest opportunity, wheat responds very well under adverse conditions. In late October, the prospects for wheat pasture seemed all but lost with most wheat planted late and dry. It was noted, however, that with timely rains, a decent wheat crop could still develop.
Mr. and Mrs. Harold Kahla of Tomball, TX, were denied farm deductions of $2,658,774 for their cattle and deer ranches, even though Mr. Kahla was knowledgeable about livestock farming and was highly successful in other businesses. They owned 300 head of cattle.
Under the IRS hobby loss rule, if you have losses in connection with any farming activity, whether livestock, horses, or crops, the IRS may suspect that the activity is engaged in as a hobby rather than a business, particularly if there is a history of losses.
After about 30 years handling tax audits, appeals and U.S. Tax Court cases, it seems to me that the IRS is taking a more aggressive approach against people in various industriesincluding livestock and horse activities. If you are audited by the IRS and you have a history of losses with little or no profits, the following advice pertains to you.
Most of the problems with hobby loss audits involve people who have a history of losses with their ranch, farm or horse venture. The IRS tends to say that the activity is not conducted as a business, so that the tax losses are disallowed. This can be a substantial tax payment for quite a few taxpayers.
In hobby loss audits, the IRS sometimes views various types of ranching activities as a means of generating tax losses, rather than a profitoriented venture. That was the issue in the Tax Court case, Ralph Wesinger, Jr., v. Commissioner of Internal Revenue.
The accuracy and businesslike nature of records is something that the IRS has been scrutinizing more and more in recent years. The IRS expects all taxpayers to maintain canceled checks, invoices, credit card statements and similar items needed to substantiate amounts claimed as business deductions and to help prepare ones tax returns.
The American wind power industry grew substantially in 2009 and at this point, almost 2 percent of the countrys electricity is produced from wind turbines. Many of these turbines are on farm and ranch properties all over the country. I have received many inquiries from people who have been approached by wind turbine developers.
The Internal Revenue Service (IRS) has been cracking down on individuals and small businesses including farmers, ranchers and horse ownerswith increased tax audits and aggressive tactics to collect taxes. The tactics include an increased volume of audits, and more bank levies and liens on real property.
Most of tax law is in grey areas. For instance, reasonable people, including those within the IRS bureaucracy, will disagree on what constitutes an ordinary and necessary business expensea big area of tax deductions. Another area concerns whether litigation proceeds to compensate for damages to farm or ranch property constitute taxable income.
A tax case, Mullins v. U n i t e d States, decided in the U.S. District Court in Knoxville, TN, considered an individual who owned and operated a cattle-raising operation who claimed he was entitled to deduct losses over a period of years.
In a lengthy decision, the Tax Court recently underscored the difficulties taxpayers have in convincing the IRS that family-run farms are engaged in for profit. The case, Smith v. Commissioner, T.C. Memo 2007-368, ruled on two families limited partnerships, involving a cow and dairy farm, a cutting horse operation, and dog breeding.
Enforcement action by the Internal Revenue Service (IRS) has actually increased in recent months in the farming, horse and livestock fields, partly due to the need for the government to raise revenue, and partly due to an increase in taxpayers failing to file tax returns or failure to pay taxes owed.
The farming, livestock and horse industries are facing challenges in hard economic times. These industries serve the economic lifeblood of millions of Americans, not only owners, but related industries and services as well. Casualties and setbacks from economic forces are recurring problems making it difficult to make a profit on a consistent basis.
The IRS is focusing more on audits in the farming, livestock and horse industries in which taxpayers are claiming six figures or more in tax deductions. This often pertains to taxpayers who are employed full time in a profession and operate the farm or other activity on a parttime basis, often relying on managers and contract employees.