Is IRS Audit Activity on Farm Partnerships Increasing?
We have had several farm partnership income tax returns pulled for IRS audits in the last few weeks. It seems that information requested so far appears to indicate they are addressing farm partnership tax returns with losses to see if the partners have both basis and whether the loss is a passive or not.
I have also had at least one client have a delay on their tax refund due to a farm loss and large W2 income from non-farm sources. We know that the IRS has a concentrated effort in this area.
We are curious to see if any other CPAs or accountants are seeing any increased activity in this area. So far, these audits are concentrated in the Minnesota region.
Paul Neiffer is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers and agribusiness processors. Paul is a principal with CliftonLarsonAllen in Walla Walla, Washington, as well as a regular speaker at national conferences and contributor at agweb.com. Raised on a farm in central Washington, he has been immersed in the ag industry his entire life, including the last 30 years professionally. Paul and his wife purchase an 180 acre ranch in 2016 and enjoy keeping it full of animals.
I have a CPA friend who has these same audit issues going on for LLC/farm partnerships over probably the last 6 months. One farm has a smaller acreage and is especially being targeted due to the number of acres. 60. I am a farmer and a CPA and it is troubling that some auditors want to disallow based on things like number of acres. Even a small farm can raise valuable crops like alfalfa square bales, in a small area. That does not preclude them from being a farm. The second thing I see is that as we get older more equipment makes the labor oriented tasks able to get done, if you have the tools to do the work. The tax law is full of things like bonus depreciation that encourages buying equipment for a tax benefit, and farmers have to have equipment that is expensive. I also feel what is wrong with using your own capital from other occupations similar to the big corporations that have multiple companies under one umbrella. They operate companies that are totally dis-similar, yet likely are being allowed to net the sales and expenses all together. Just because one is a farm, they do not single out that enterprise and limit losses to -0-. The auditors are making farm visits which is good, but I think sometimes they are not willing to recognize the increased appreciation in the assets and the FMV of fully depreciated equipment as future taxable earnings. I have several clients in their younger stages that hold back heifers for future breeding stock and causing a big reduction in their potential sales. That may yield a year with -0- sales, but sure does not mean you are not for profit.