IRS Tests Hobby Loss Audit Program for Farms

The IRS has issued guidance on a pilot audit program targeting hobby losses from farming.  The memorandum issued by the IRS begins as follows:


The purpose of this memorandum is to issue guidance on a pilot program for Schedule F Expenses for SB/SE Correspondence Examination. Although this pilot will only be worked in the Brookhaven Campus, phone calls may be received in all SB/SE Campuses. Please distribute this information to all affected employees within your organization.

The pilot is expected to begin April 1, 2017 and conclude April 1, 2018.

The attached document contains additional details.

Purpose: This interim guidance communicates temporary procedures for a pilot program auditing Schedule F Expenses. The pilot will focus on verifying certain Schedule F expenses.

Background/Source(s) of Authority: There has been limited coverage of Schedule F in recent years in Correspondence Exam (Corr Exam). We believe there may be compliance issues such as deducting expenses on the wrong form, deducting expenses actually belonging to another taxpayer, or related to Internal Revenue Code (IRC) § 183. We will use the same filtering process as is currently used for Schedule C examinations.

Taxpayers are being asked to provide documentation to show they qualify for the questioned expenses. In general, a taxpayer may deduct reasonable, ordinary, necessary and business-related expenses on Schedule F.

Occasionally, the items being verified appear to be legitimate and verifiable deductions but they should not be on a Schedule F. They are not deductible on the Schedule F if they are related to the taxpayer’s W-2 job, the Schedule A, or a Corporate Return. These cases may also have start-up costs or a hobby loss where enjoyment is the main focus of the activity.

Leads will be generated from a series of compliance Data Environment (CDE) filters run through Campus Workload Delivery (CWD) elimination filters. The filter is designed to identify those taxpayers who have W-2s with large income who file a Schedule F and may not have the time to run a farm.

This pilot consists of 50 TY 2015 cases. Project Code 0199 will be used to monitor pilot cases.

Procedural Change: A section has been drafted in IRM 4.19.15 as Interim Guidance (IG) procedures, specifically IRM, Schedule F Expenses, to provide guidance for working the pilot program.

Effect on Other Documents: Pending the outcome of this pilot, this guidance may be incorporated into IRM, Schedule F Expenses, at the conclusion of the pilot.

Effective Date: April 1, 2017


See full memo at: Memo

Posted by Lewis J. Saret, Co-General Editor, Wealth Strategies Journal.