There was a seven percent increase that year in individual audits, and an eight percent increase in small business audits. Most of the increased revenue pertains to taxpayers who underreported income -- the main area that seems to arise in audits.

The IRS plans on still increasing the number of audits, particularly on people who work for themselves. Last year there was an increase of audits of taxpayers making $100,000 or more by 14 percent from the preceding year. The number of individual income tax returns audited reached a 10-year high in 2007.

This comes as the IRS faces heavy pressure from Congress to raise additional revenue to help shrink the nation's deficit. Also, the IRS has increased audits of taxpayers involved in partnerships and S corporations, as well as �abusive� tax shelters.

Most farmers, ranchers and horse breeders invariably have �day jobs� that constitute their main source of income. The ranch or farming activity usually incurs losses for a number of years, and these losses are used to offset taxable income. Of course, most people want to ultimately make a profit in their venture, but in the meantime they are entitled to take tax deductions so long as the horse or other livestock or farming activity is operated �for profit,� that is, the taxpayer has the �intention� of making a profit despite the fact that there are losses.

A significant segment of audits will continue to be in the hobby loss area. It is interesting to note that there are a large proportion of audits are of physicians who operate cattle or horse farms on the side. For some reason, the IRS seems to target that particular segment, perhaps because they tend to have high incomes and little time to manage a farm or ranch, and they take large tax deductions. It is not fair to generalize, but physicians seem to be targeted quite often.

The only way to convince the IRS that your cattle or horse -- or for that matter any other farming venture -- is operated as a business, not a hobby, is to have good documentary evidence. If you are audited it is advisable NOT to attend the audit, but to have a qualified representative, such as an experienced accountant, interact with the revenue agent. In larger or more complex cases you should hire a tax attorney, who will work together with the accountant.

Often the IRS agent will illicit damaging information directly from the taxpayer, or the taxpayer will not provide solid enough answers to the questions raised. In most instances where the taxpayer represents himself, the IRS rules against him and denies the tax deductions. That is why it is best to have a tax practitioner represent you.

Tax collectors have been vilified since Biblical times. Today's revenue agents can be very nice people -- but the fact remains that their job is to raise revenue, and the IRS has an institutional bias against taxpayers who claim to be operating a ranch, farm or horse activity �for profit� when there are no profits, but only write-offs.

Still, in a number of instances, I have been successful at the audit phase in convincing the IRS that the taxpayer's activity should withstand scrutiny, and the deductions were upheld. This occurs when the taxpayer contacts me early enough so that I can get a fresh start, and where there are some decent facts to work with. It often also entails �educating� the revenue agent as to the particular aspects of the cattle industry, horse industry, or other farming operations, and presenting appropriate legal points and authorities. For most any tax problem, there is a solution.