Before I get into this month's topic, I want to announce my new website: www.JohnAlanCohan. com. At this site there are legal and tax tips involving the horse, livestock and general farming industries, as well as sections on dog breeding, boating and aviation.
Now, the U.S. Tax Court is a Federal court established by Congress to provide a forum in which taxpayers can dispute IRS tax deficiencies assessed against them. This is a court, as it were, of last resort for taxpayers.
If you are assessed a deficiency after an audit, the IRS will want you to sign a letter “agreeing” to the assessment. Or, you can request to have an appeal within the IRS bureaucracy.
If you choose, you can go directly to Tax Court once the IRS issues a 90-day letter, or deficiency notice. It is called a 90-day letter because you have 90 days in which to file a petition in Tax Court. For most people reading this column the main issue would be the hobby loss rule.
The Tax Court is composed of 19 presidentially appointed judges who are well versed in tax law. Although the Court is physically located in Washington, D.C., court sessions are held throughout the country, so that the lawyer who files your case can designate a city convenient to you.
The advantage of Tax Court is that you have the opportunity to settle your case. Most cases are handled by tax attorneys experienced in Tax Court procedure. Federal rules of procedure apply to all proceedings.
Many people who lose audits give up at the audit phase, not realizing that they have a much better opportunity to either win or settle the matter in Tax Court.
Most of the problems with hobby loss audits involve people who have a history of losses. The IRS tends to say that the activity is not conducted as a business, so that the tax losses should be denied. This can be substantial for quite a few taxpayers. Most of the cases I handle in Tax Court involve people who have several hundreds of thousands of dollars in tax deficiencies.
Sometimes during an audit the agent will ask you to waive the statute of limitations, which I usually do not recommend, although in some instances it may be appropriate—-but that is something that depends on the circumstances. For instance, if your audit is a complex one that may take considerable time, the revenue agent may genuinely need additional time and, if all is proceeding fairly well, it may be appropriate to allow for an extension of the statute of limitations.
Tax planning in advance is always the best approach in operating an activity in the horse, livestock or farming industries. One of the worst things you can do is to try and get advice from one of the IRS “hot lines” in which you can pose questions to IRS agents. The problem is that, first, the information given over the phone is not binding on the IRS. Second, you will likely get different answers to the same question, depending on whom you speak with. Third, IRS agents may not be able to answer complex questions, and how you frame a question will be a factor in what answer you get. And fourth, you will have no documentary evidence to prove what the IRS officer told you.
Although these industries are crucial to the American economy, the IRS takes a skeptical view towards taxpayers who have a history of losses in these areas. That is why the hobby loss rule was implemented. But at the same time, taxpayers who go to the effort of pursuing their cases in Tax Court usually can get a better opportunity to have a satisfactory result. It will still be necessary to have evidence that your activity is conducted in a businesslike manner, and often this entails proving that you consulted an expert at an early stage--preferably at the time of starting the venture--in order to determine just how you could make a profit in this activity over time.
[John Alan Cohan is a lawyer who has served the horse, livestock and farming industries since l98l. He serves clients in all 50 states, and can be reached by telephone at (3l0) 278-0203 or by e-mail at JohnAlanCohan@aol.com. Website is www.JohnAlanCohan.com]