An Internal Revenue Service agent reviewing your tax returns is a picture most people shudder to think about. However, attorney John Cohan says a few preliminary thoughts along those lines could sooth some of the initial angst.
"The most frequent question is what to do – what sort of strategies, procedures, and preparation should a taxpayer undertake before meeting with an IRS agent," he says. "For livestock owners facing an IRS audit, the principal issue is whether losses in the livestock activity are deductible or whether they are 'hobby losses', which are not deductible."
From his experience in working with farmers, Cohan has accumulated some practical advice, which he shares here:
1. You or your represen-tative should find out what the IRS agent is looking for prior to formally participating in the audit.
2. Don't attend the audit. Instead, delegate that duty to a representative (an attorney or qualified tax representative) because it is an adversarial proceeding and 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 business records with your representative to insure that they are organized in the best possible manner. If your livestock activity is conducted as a corporation, review the Corporate Minute Book to make sure it is 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 is on various issues.
6. In future tax planning, particularly if your losses are large, obtain a tax opinion letter from a tax attorney to support that your operations are consistent with IRS Regulations. A tax opinion letter serves an important evidentiary function to show that you are 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 by giving the IRS more time or opening up further opportunities for it to make a fishing expedition out of your tax returns.
8. If you are denied the deductions and issued a 30-day letter, don't be discouraged. You have many rights, and at this stage you can consult an attorney and decide whether to go to Tax Court, or to IRS Appeals. In order to proceed to Tax Court you have to await issuance of a "deficiency notice," giving you 90 days in which 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 at the IRS audit phase, and if you have a strong case you can end up with a satisfactory outcome.
10. If, on the other hand, you prefer to go to IRS Appeals first, which is an option most people take, your case will remain within the IRS bureaucracy, although a different staff will review the facts. Often, if you are properly represented at this stage, you can get a satisfactory result, but the best results are generally obtained in the Tax Court arena.
Taxpayers who succeed at the audit phase are those who have had the best tax planning early on.
Editor's note: Attorney John Cohan has served the livestock industry since l98l. He can be reached at (3l0) 557-9900, or e-mail JohnAlanCohan@aol.com.