Discussion:Audit - Horse Industry
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Discussion Forum Index --> Advanced Tax Questions --> Audit - Horse Industry
Discussion Forum Index --> Tax Questions --> Audit - Horse Industry
Breezygirl (talk|edits) said: | 19 October 2007 |
| Help, this is the first time a client of mine is being audited. Can anyone give me some pointers? Especially if you are familiar with the horse industry? I've gone over the reutrn and all the forms are in order, but they denied ALL expenses and are having her go in with ALL receipts to prove her expenses. Especial M&E and auto. Thanks for any input you have. Teresa | |
| 19 October 2007 | |
| "Horse Industry" covers a broad category of activities. What specifically does the taxpayer do? | |
Death&Taxes (talk|edits) said: | 19 October 2007 |
| And it is not so much receipts they care about, but the Sec. 183 question. | |
| 19 October 2007 | |
| If profit motive is an issue, there are any number of cases; Giles TC Memo 2006-15, Mitchell TC Memo 2006-145 [two recent cases], that concern profit motive in this business or like businesses. There is a very important case where the "gentleman farmer" was successful in proving he was engaged in an activity for profit, I'm sure someone here has the cite [Edit: Mullins v. U.S. 94 AFTR 2d 2004-5389 (E.D. Tenn. 2004) that's Amerian Federal Tax Reports 2nd, if you have a law school library or good courthouse library around, or RIA]. Otherwise, you just have some basic audit issues. Review the Cohan rule if she lacks receipts alltogether [her calendars etc. may shed some light, but review them carefully for pitfalls]. You can try to reconstruct them. There are special recordkeeping requirements for meals, entertainment and autos you should review. | |
Death&Taxes (talk|edits) said: | 19 October 2007 |
| Or the case of the woman who designed barns(?) and was active in horses, meeting clients through horse show activities, Tracy Topping: http://www.ustaxcourt.gov/InOpHistoric/Topping.TCM.WPD.pdf. For a lark, go to the US Tax Court site, click the opinion search tab and type "horse shows" into the 'Text Search' box. | |
| 19 October 2007 | |
| IRS doesn't pay much attention to court cases, as the facts are always different. It does do a factual analysis of each of the pertinent factors in the 183 Regs. The internal Appeals settlement reports don't do much if any case citin', except for generic purposes. | |
Death&Taxes (talk|edits) said: | 19 October 2007 |
| I didn't mean to imply that you throw cases at the auditor, but rather from reading them you will have some idea what it takes to prove a profit motive. They will also give an idea of the record keeping needed. Check out the many decisions that went against the taxpayers.
Cases do nothing until a position is taken, but they can point to strengths and weaknesses of your client. Many times in profit motive cases, once a report is written, you are now preparing for a meeting with manager and the subsequent appeal. | |
| 19 October 2007 | |
| At times the Courts don't quite say what factors they liked or didn't like. In my exp, working with local IRS Counsel, personal pleasure elements were #1, maybe business-like #2. Like what a hardware store would do in light of continuing losses. | |
| 19 October 2007 | |
| Yes I agree, by reading some cases, and with her first audit, it can give her an idea of just how far off the reservation her client could be. If you can find a sucessful case, it may help you shape your approach(whatever precedential effect it may have); but as I remember the Mullins case, the fellow had his ducks in a row (from the sounds of it, he could well afford to have his ducks in a row). Breezy, consider filling out your profile? | |
| 19 October 2007 | |
| Before you get off too far on the law - look at the facts.
(1) Is there substanitation for the expenses? (2) Was there a real intention to make a profit? (3) Was the activity conducted in a business-like manner? It would be helpful if you would describe the activity and at least some order of magnitude numbers. For example if there was $100 of income and $20,000 of meals and entertaniment expenses then your approach is differenct than if you had $5,000 of income and $1,000 of meals & entertainment. In all audits, I use the "straight-face" test. In order for me to argue for something, I must be able to keep a straight face while I explain it to the examiner. | |
| 19 October 2007 | |
| I am informed that the activity is horse training and shoeing. These activities per se do not lend themselves to the abuse and hobby stigma as things such as showing horses does. That does not mean that Section 183 is not an issue. The taxpayer could have his/her own horses that are not part of the for-profit activity that none-the-less are part of the expesnes of the return. This is a facts-and-circumstances situation and, if you are not comforable with it, I suggest you hire another experienced professional to look at the return and give you some guidance. | |
Doug Phillips (talk|edits) said: | 19 October 2007 |
| Some things that have really saved the TP position on several audits:
No personal pleasure: ie, TP does not ride, has no "personal" horse; has no children. Frequent consults with county agent, or other professional, which all were documented. Written business plan, showing changes made to improve profit. Value of assets of project (horse, barn, land, fixtures)IF SOLD, would generate a profit exceeding all losses taken. | |
| 19 October 2007 | |
| I had a "horse audit" that was going OK until the taxpayer disclosed that the actual owner of the horses was her 18 year old daughter. Too bad she had never told me that. | |
| 19 October 2007 | |
| D'Oh!
And another IRS examiner maybe got a little performance award. | |
| 19 October 2007 | |
| Note for Breezy's audit notebook: Do not take client to the audit unless client is summoned. IRC 7521(c). | |
| 19 October 2007 | |
| I would not take client even if summoned. Let them try to enforce it. | |
| 19 October 2007 | |
| Your typical Asst U. S. Attorney will have rather contrarian views on summons enforcement for mere t/p testimony. However, the worm can turn if IRS is suspicious and admin summons' the daughter. Their parents will usually "plea bargain" for summons cancel and candid answers to Q's posed to a 2848 rep IRS thinks is OK. Still up to IRS to develop the issue. | |
Death&Taxes (talk|edits) said: | 19 October 2007 |
| Loose cannons is what I call them, but there are times having the client there is unadvoidable. Client's property and records were in German is one example; client had such technical expertise about her business process that she could make self and auditor feel foolish. An IRS audit in 1997 at the client's house/non-deducted home office could hardly avoid having the client sit nearby, and we were rewarded when Tom Brokaw's personal assistant called her to get a quote for some segment. Some ministers are excellent also, but these are truly the exception. When a client explained an equipment leasing shelter/deal to me as "Sid and I meet once a year to swap checks" I knew it was time ship him off on vacation.
I do know of one race horse(s) owner who handled the audit himself. He was the president of some regional horse breeder's association, plus his clothes exuded the smell of the barn. | |
| 19 October 2007 | |
| A judicious bruise in the shape of a horseshoe on her forehead my really get the point home that it's a true shoeing operation. There's a name for this profession, but I can't remember it. The guy on "Dirty Jobs" had a horse shoeing segment, and the the horse was putty in the hands of the horse guy, so I dont' know if this would work. lol. | |
| 19 October 2007 | |
| "...plus his clothes exuded the smell of the barn."
There's lore galore within IRS of that effectiveness as to any issue. Intentional? Either way, the interview short as possible but minimally to meet Quality Audit Standards. At times, no 2848 POA with Tax Court practice, TEI membership, plus Commissioner's Advisory Committee can be half as effective. | |
