Executives with Schedule C Businesses Beware: Increased IRS Enforcement is Coming
By Anthony P. Daddino on June 9, 2016
It would appear that the IRS has been allowing executives and other high-wage earners to offset their taxes by losses from their hobby activities. At least, that was the conclusion of a recent report by the Treasury Inspector General, which has oversight responsibility over the IRS. The Treasury Inspector identified a sample of returns with the following attributes: (i) wages of $100,000 or more; (ii) Schedule C receipts of $20,000 or less; (iii) net business losses of ($20,000) or more; and (iv) four consecutive years of losses. The Treasury Inspector critically observed that only 4% of those returns had been selected for audit by the IRS and not necessarily for hobby-loss reasons. Further, based on its review of the sampled returns, the Treasury Inspector estimated that over 88% of the returns showed an indication of a business not for profit. The Treasury Inspector recommended that the IRS modify its audit detection techniques to flag high-income returns with multi-year Schedule C losses. The Treasury Inspector also recommended that the IRS increase hobby-loss compliance checks in SB/SE audits to ferret out potential abuses. The IRS agreed with both recommendations and agreed to implement corrective measures by March 2017. For a full copy of the Treasury Inspector’s report, follow this link: https://www.treasury.gov/tigta/auditreports/2016reports/201630031fr.pdf.
The takeaway is that IRS scrutiny is coming for wage-earners with multi-year Schedule C losses. The time is now to visit with your at-risk clients about the nature of their Schedule C businesses and to help them bolster and document the for-profit nature of such businesses so as to better fend off a future challenge by the IRS. If you have any questions regarding the Treasury Inspector report or ways to help your clients enhance the bonafides of their part-time businesses, please do not hesitate to contact Anthony Daddino at (214)749-2464.
The material contained within Meadows Collier Tax Blog - MC Talks Tax and any attached or referenced pages, has been written or gathered by Meadows, Collier, Reed, Cousins, Crouch & Ungerman, L.L.P., for information purposes only. It is not intended to be and is not considered to be legal advice. Transmission is not intended to create and receipt does not establish an attorney-client relationship. Legal advice of any nature should be sought from legal counsel.