The IRS has been accused of using inappropriate political criteria, or “viewpoint discrimination,” in processing of applications by tax exempt organizations. President-elect Donald Trump will no doubt replace the IRS Commissioner, John Koskinen, who himself has been accused of obstructing congressional investigations.
The IRS is a bureau of the Department of the Treasury. Incoming Secretary of the Treasury Peter Mnunchin, indicates that likely changes of tax law will include a lowering of the corporate tax rate from its current 35 percent level, and a return of more than a trillion dollars American companies currently hold abroad to avoid U.S. taxes.
The IRS Commissioner is responsible for the administration and enforcement of Internal Revenue laws. The IRS Commissioner’s vast powers include prescribing Treasury Regulations administered by the IRS.
For the horse and livestock industries, IRS regulations have been an important enforcement mechanism. Many of the regulations have not been changed for decades, and require the taxpayer to go through numerous hoops to prove that their activities constitute a business rather than a hobby.
A new commissioner will have the power to revise the IRS Manual, which guides agents in conducting audits. The manual has detailed instructions on how to conduct audits for taxpayers in the horse, cattle and other livestock industries. The manual should be changed so that auditors will be less aggressive in presuming that losses incurred by taxpayers automatically implies a motivation to generate “tax benefits,” or that a primary motivation is personal pleasure and recreation.
The commissioner can help encourage IRS agents to recognize that it takes a significant period of time and effort to develop a superior line of animals, and that almost always in the startup years losses are commonplace. This is true as well for most any small business venture. IRS agents should also back off from the tendency to second guess decisions made by the taxpayer.
IRS auditors also need to recognize that advertising and promotion of one’s activity may take a variety of forms. Print advertising is no longer the only means of promotion: The Internet has opened up opportunities not available in previous decades, and word of mouth advertising has become increasingly important and effective. Also, the IRS needs to recognize that owners and breeders often become experts in their own right over time, and therefore are entitled to be regarded as experts for purposes of making informed financial decisions.
The IRS Manual should also be modified to inform auditors that a “business plan” need not be in writing, that taxpayers may formulate credible plans, simple and straightforward, other than in written form.
Finally, the IRS must do away with its ill-advised tendency to question taxpayers on how they expect to “recoup” all past losses. The concept of “recoupment” has been misconstrued and misapplied. And the concept has been rejected by the Tax Court in an important case, Helmick v. Commissioner (T.C. Memo 2009-220). The only concern should be forward looking, that is, how the taxpayer expects that the activity will generate an overall profit in the future, not how the taxpayer might recoup the prior loss.
