The last time Congress tried to remove a public official via impeachment was in 1876, when Secretary of War William Belknap was impeached on allegations he had helped himself to war funds. He resigned under pressure from President Grant.
IRS agents are often viewed with disdain by people subjected to audits in the livestock industry because agents frequently do not understand the intricacies of the industry.
When conducting audits of livestock ventures, revenue agents usually rely on an IRS tax audit guide pertaining to the livestock industry. The guide is loaded with “gotcha” questions and prejudicial commentary.
For example, the guide states: “As in every business, the means for under-reporting income is as varied as those who choose to undertake such ventures. The most successful rancher may fail to disclose all income because of the accompanying income tax benefits. Farmers having a very good year with a sudden turnaround just before filing time may be dealing with a cash-flow crunch.”
If you are audited in connection with your livestock activity, your auditor will be looking for the following red-flag situations:
- Sales of animals through atypical sources
- Bartering that may account for some sales; swapping of equipment or services for breeding stock
- Use of multiple bank accounts with reliance on the bank records for reporting purposes (The IRS thinks this lends itself to misreporting due to exclusion of some records.
Revenue agents also watch for transfers to or from savings, money market and investment accounts.)
- Personal expenses deducted as farm expenses (This is the most common form of misreporting among farmers and ranchers.)
Farming is a lifestyle that takes tremendous dedication and focus. All aspects of a farmer’s life are centered on the animal, and therefore nearly all aspects of a farmer’s life can be easily considered to be financially related to the business.
Customarily, revenue agents find personal expenses in insurance, gasoline, interest, taxes, utilities and repairs itemized along with other ordinary and necessary farming expenses.
Revenue agents need to understand that the livestock industry is dynamic and that various elements in the economy may dramatically tilt a taxpayer’s activity toward profit or loss.
Changes in supply and demand for particular animals can run the prices up or down. An oversupply of animals can push prices down.
The weather impacts on profits as well, with drought, flood, heat spells and blizzards that can result in feed cost increases, reduced availability of grazing pasture or outright death to animals through heat exposure, drowning or isolation with subsequent starvation.
Health considerations can affect profits. For instance, reaction to England’s “mad cow disease” hit the cattle market quickly and hard for a short period of time. Diseases and illnesses can affect long-range efforts to rebuild markets.
The audit guide recognizes that if undesirable market conditions begin to appear, this may trigger the need to sell breeding stock and then later acquire fresh stock from further breeding or direct purchases.
The IRS guide also asks revenue agents to watch out for taxpayers who conduct more than one activity and to take into consideration the “material participation test.”
The manual states that if a taxpayer is engaged in a full-time occupation outside of the livestock activity, that raises a question of how the taxpayer has sufficient time in which to “materially” participate in the activity. If the IRS finds that you are not materially participating, it could deny you the right to deduct losses against outside income.
If you are audited, it is helpful if you can show that you are either making a profit in the activity or that you are in the middle of a profitable year – or at least that your losses are declining. It is usually prudent to have an experienced taxpayer representative handle the audit on your behalf.
The main consideration in any audit concerning livestock industry or other farming activity is whether the taxpayer has an honest intention of engaging in the activity with a view toward making a profit rather than as a hobby.
This is shown by objective as well as subjective evidence. Many of my clients have been successful in withstanding IRS scrutiny because they have made it a point to get professional legal guidance early on. 
John Alan Cohan is a lawyer who has served the livestock and farming industry since 1981. He serves clients in all 50 states and can be reached for legal consultation via e-mail or at (310) 278-0203.
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John Alan Cohan
- Attorney at law
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