Be ready to meet with an IRS agent I often receive phone calls from people who are being audited by the IRS in connection with their farm activities. The most frequent question asked is what to do - what sort of strategies, procedures and preparation should a taxpayer undertake before meeting with the Internal Revenue Service?
Farmers often operate over a period of years without making a profit, despite federal subsidies. Farmers facing an IRS audit are often confronted with the question of whether they are operating for profit or whether the crop losses are "hobby losses" that are not deductible.
Here are points of practical advice if you are audited: 1) You or your representative should find out what farming issues the IRS agent is looking for prior to participating in the audit.
2) Don't personally attend the audit - delegate that duty to a representative (an attorney or qualified tax representative) because it's an adversarial proceeding. Often, the less you say, the better.
3) If the amount of money at stake is considerable, hire a tax attorney to represent you.
4) Review the strength of your farm records with your representative to ensure that they're organized in the best possible manner. If your farming activity is conducted as a corporation, the Corporate Minute Book should be reviewed to make sure it's updated.
5) At the audit, your representative should provide only those documents specifically requested. Your representative should be experienced enough to sense what the agent's thinking on various issues.
6) In tax planning for the future, particularly if you have large farm losses, obtain a tax opinion letter from a tax attorney to show that your farming activity is operated according to IRS regulations. A tax opinion letter serves as an important evidentiary function to show that you're in compliance with IRS regulations according to the opinion of an expert.
7) If the IRS agent asks you to waive the statute of limitations, don't do it. There is no benefit to you in giving the IRS more time or opening up further opportunities for them to make a fishing expedition out of your tax returns.
8) If you're denied the deductions and issued a 30-day letter, don't be discouraged. You have many rights, and can consult an attorney and decide whether to go to tax court or to IRS appeals. To proceed to tax court you have to await issuance of a "deficiency notice," giving you 90 days to take action.
9) In tax court you have a better chance of prevailing, particularly if you have a good representative or lawyer on your case, although legal fees can be considerable. The tax court has an entirely different philosophy than the IRS audit phase, and if you have a good case you can end up with a satisfactory outcome.
10) If you prefer to go to IRS appeals first, an option most people take, your case will be within the IRS bureaucracy. However, a different staff will review the facts. Often, if you are properly represented at this stage, you can get a satisfactory result. But, again, the best results are generally obtained in the tax court arena.
Farmers who succeed at the audit phase are those who have had the best tax planning early on. That's usually the case with farmers who go to the expense of obtaining a formal tax opinion letter from an attorney. It's one of the best ways of establishing evidence that your activity is conducted in a businesslike manner vis-a-vis IRS regulations on the farming industry.