More IRS Schedule F Audit Activity May be Coming

• March 6, 2017
• Paul Neiffer

We just recently reviewed an memo regarding a new IRS pilot program to audit farmer’s tax returns.  It appears that the primary thrust of the audit is to target 50 2015 farmers income tax returns with high wage income and large Schedule F farm losses.  If you have a tax return similar to this, you may be getting an audit notice soon.  This notice may just request additional information to verify the deductions on the return or it may be a full blown audit.

Additionally, the memo suggest that IRS auditors pay close attention to the following expenses:

• Prepaid Farm Expenses – Do the expenses actually qualify as prepaid farm expenses or is this really a deposit.  The following factors lead it to be classified as a deposit according to the memo:
  • The absence of specific quantity terms.
  • The right to a refund of any unapplied payment credit of the contract.
  • The treatment of the expenditure as a deposit by the seller.
  • The right to substitute other goods or products as specified in the contract.
• I must admit that many of the “prepaid” contracts I see between farmers and vendors might fail one or more of these tests.
• Mortgage Interest – IRS is trying to verify that proper amounts are being deducted on Schedule A and Schedule F.  Too many farmers are deducting all mortgage interest on Schedule F and using the standard deduction on Schedule A (according to the IRS).
• Repairs and Maintenance – Looking for repairs that are actually improvements.  With the increase in Section 179 to $500,000, this is not the issue it used to be.

Just be forewarned that additional IRS scrutiny may be coming after several years of low audit activity on farmers returns.  We will keep you posted.

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