The U.S. House of Representatives is considering a resolution to impeach IRS Commissioner John Koskinen for violation of the public trust, failing to comply with congressionally issued subpoenas, and misleading the public over IRS practices of targeting conservative groups in audits.
The last time Congress tried to remove a public official via impeachment was in 1876, when Secretary of War William Belknap was impeached on allegations he had helped himself to war funds. He resigned under pressure from President Grant.
Internal Revenue Service agents are often viewed with disdain by people subjected to audits, especially in the horse industry because agents frequently do not understand the intricacies of breeding, racing or showing.
When conducting audits of horse ventures, revenue agents usually rely on an IRS tax audit guide pertaining to this field.
The guide is loaded with “gotcha” questions and prejudicial commentary. For example, the guide states: “Many of the taxpayers who potentially fall under the provisions of IRC section 183 with respect to horse and cattle activities have been involved in such activities during their youth. These taxpayers have grown up on farms or had close relatives who operated farms. Other taxpayers had unfulfilled childhood aspirations to be involved with such activities, but circumstances prevented participation. As adults, these taxpayers have achieved the financial wherewithal which permits participation.”
Farming is a lifestyle that takes tremendous dedication and focus. All aspects of a farmer’s life are centered on the animal and therefore nearly all aspects of a farmer’s life can be easily considered to be financially related to the business. Customarily revenue agents find personal expenses in insurance, gasoline, interest, taxes, utilities and repairs itemized along with other ordinary and necessary farming expenses.
Revenue agents need to understand that the horse industry is dynamic, and that various elements in the economy may dramatically tilt a taxpayer’s activity toward profit or loss.
Changes in supply and demand for the particular animals can run the prices up or down. The weather impacts on profits as well, with drought, flood, heat spells and blizzards that can result in feed cost increases, reduced availability of grazing pasture, or there can be unexpected casualties or illnesses. Casualties and diseases can affect long range efforts to rebuild markets.
Health considerations can affect profits. For instance, reaction to England’s “mad cow disease” hit the cattle market quickly and hard for a short period of time. Diseases and illnesses can affect long range efforts to rebuild markets.
The audit guide recognizes that if undesirable market conditions begin to appear, this may trigger the need to sell breeding stock and then later acquire fresh stock from further breeding or direct purchases.
The IRS guide also asks revenue agents to watch out for taxpayers who conduct more than one activity, and to take into consideration the “material participation test.”
The manual states that if a taxpayer is engaged in a full time occupation outside of the horse activity, that raises a question of how the taxpayer has sufficient time in which to “materially” participate in the activity.
If the IRS finds that you are not materially participating, it could deny you the right to deduct losses against outside income.
If you are audited, it is helpful if you can show that you are either making a profit in the activity or that you are in the middle of a profitable year.
Sometimes it can be important to have an expert witness prepare a report explaining how external circumstances contributed to losses, or to discuss the quality of pedigrees and businesslike methods demonstrated by the taxpayer.
It is usually prudent to have an experienced taxpayer representative handle the audit on your behalf. The main consideration in any audit concerning horses or other farming activity is whether the taxpayer has an honest intention of engaging in the activity with a view towards making a profit, rather than as a hobby.
This is shown by objective as well as subjective evidence. Many of my clients have been successful in withstanding IRS scrutiny because they have made it a point to get professional legal guidance early on.
