Equine Tax Law

Strategies in Case of an IRS Audit

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Excessive business deductions by livestock or general farmers, or horse owners--or for that matter, most any other business-- trigger IRS audits.  If you are audited in connection with any farming, livestock or horse activity, the IRS will usually start with one tax year and then look back or forward for other years to see the history of losses or profits.

If audited, it’s crucial to have documentary evidence not only to substantiate the deductions, but to show how they relate to your venture, and how the records help prove that you are operating in a businesslike manner. .

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“Failure to File” Syndrome

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A surprising number of people have not filed tax returns for three years or more.  Eventually, they realize the IRS will catch up with them.  Research shows that most non-filers are=2 0financially sophisticated, successful professionals, including attorneys and accountants. Non-filers are often workaholics. They realize they will ultimately be discovered, and they know there will be financial penalties from failing to file.

Some will seek to defend themselves on the grounds of mental illness rather than an intent to disobey the law.  A psychiatrist, Stephen Coleman, has identified a “failure to file” syndrome, and he has treated quite a few patients, to some degree with anti-depressants.  Some factors that can affect a person’s mental state are depression, anxiety and chronic procrastination. .

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New Tax Court Case Stresses Higher Standards of Recordkeeping

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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.   The court held that the cow and dairy farm was engaged in for profit under the IRS hobby loss rules, but not the other activities.

The taxpayers had taken significant tax deductions against their income from the activities, thus prompting an IRS audit, which they lost and then appealed to the Tax Court.    As discussed in the decision, the taxpayers believed that family dairy farms were not doing well, so they sought a niche in the market in order to compete as to product and price, and decided to raise Normande cattle.   A milking parlor with automatic milking equipment and other improvements were made, pastureland reclaimed, and miles of fencing installed.  .

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Tax Tips for Tax Season

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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 has asserted the idea that owners are expected to “show how” you intend to profit monetarily from the activity if there are sustained losses.   In other words, how are you going to be able to demonstrate that a profit will eventually be made from the activity?  What sort of documentary evidence will you need to assemble?   The IRS feels that taxpayers involved in farming, ranching or horses should have a definite idea as to how they are going to generate a profit, and this in turn will show that the activity is conducted with an “actual and honest objective of making a profit.”   The IRS tends to grant greater weight to objective evidence than to the taxpayer’s mere statement of intent.   .

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Recent Tax Court Case Clarifies IRS Regulations

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Many people who own livestock farms are full-time professionals in non-farming fields. But another large segment of ranching consists of retired individuals who wish to supplement their retirement income with profits from ranching, farming or raising horses. The IRS often enough will assess deficiencies against these individuals based on the idea that the activity is simply a means of generating tax write-offs.

An example of this was the case of Garbini v. Commissioner, T.C. Summary Opinion 2004-7. This involved the issue of whether the taxpayers were engaged in an activity for profit in connection with a cattle and horse breeding operation in Myrtle Creek, Oregon. .

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