We began the operation in 1998 and have not shown a profit due to unforseen circumstances. They are trying to say we are ahobby and not a for profit. We have made money and have been making changes to the operation a little at a time. We raise and compete for championship titles on the dogs so that when we breed them, people want the pups due to their parents records to either compete with themselves or to add to their breeding program. I have spent quite a while developing the right lines to breed. Just like with show or race horses. Our unforseen problems which slowed us down were #1 Had two mortgages for two years due to our other home not selling during that time. #2 approx 6 months before I went independent as an investment rep, 9-11 hit , no one wanted to invest and my income suffered as well as our perfest credit. #3 during that same time frame my husband owned his business and the company he was invoicing was not paying in full for a year. We are fighting this! any suggestions?
2006-11-27 02:43:57 · 7 answers · asked by Bird Dog Lady 1 in Business & Finance ➔ Taxes ➔ United States
You are in a difficult fight. Dog breeding cases are tougher than horse breeding because there is not as much financial "upside" in dog breeding. Still, it is possible to win.
The "A" or "F" question is your subjective intent in pursuing the activity. If you convince the auditor that your GOOD FAITH (not "reasonable" -- which means that the standard is subjective, not "objective" -- what matters is what you intend, not what a "reasonable tax auditor" would intend) PRIMARY (meaning of first importance, not necessarily your only motive) MOTIVE is to make a profit, you will win. Still, this is tough. Based on your question, it sounds like years 5, 6 and 7 are being audited. Those are not considered "early start-up years" for dog breeding. You need to show why you have not made a profit yet. This can be done.
Start by giving the IRS evidence about other kennels in your breed that have made a large profit, and show how you have followed their path.
Show your good books and records.
Show the value of your assets used in the business (your dogs, plus whatever other assets you have).
Show the earning potential of the top stud dogs in your breed, and bitches as well, and explain why you believe that you can achieve similar results.
Formulate your responses in terms of the 9 points in Treasury Regulation 1.183-2(b). This is the format that the IRS will understand. You can get a copy of this regulation at a law library, or from a tax attorney or a CPA. It is also available on-line at http://www.law.harvard.edu/library/services/research/guides/grfs/specialized/tax_13.php. This is important.
The set-backs that you cite in your question will not help you. They do not relate to your dog breeding business. How about the market conditions in your breed? If they have been depressed, this could be a factor that would help you.
If you can afford a professional representative, that is helpful too, but not essential.
Only you can know what your state of mind was during those years. If it was primarily to make a profit, then go for it and do not give up. Go to the Appeals Division of the IRS if the Examination Division will not believe the truth. You get a fresh look from an independent person at the Appeals Division.
Put everything in writing. Talk about changes in the dog business that you have made to increase profitability.
Talk about the experts with whom you have consulted, both about breeding and showing dogs, and if possible, about the "business" side of the dog business. Demonstrate your own expertise, either by results in shows, or positions in dog breeding trade organizations, or even testimonial letters from other breeders or judges.
Have you taken any sales training, for the benefit of your dog business? If so, bring this fact to the attention of the IRS.
If you have had success in other businesses, show evidence of your success in other entrepreneurial endeavors.
There is an extensive discussion of the relevant tax law and cases at http://tax.cchgroup.com/FocusOnTax/2005-07/Hobby_Losses_TAXES.pdf. You might want to read it. It is available online without cost. CCH is an excellent publisher of tax information.
You might also look at resources for horse businesses and adapt them to your use. For $69.95 plus shipping and handling, there is a training video tape called: FIGHTING BACK: SUCCESSFULLY REPRESENTING YOUR HORSE BUSINESS TO THE IRS. It is available through an equine tax attorney's website at www.husbandlaw.com. It is set for horses, not dogs, but the applicable parts of the law are the same, and it designed to teach people to represent themselves.
You have a tough fight. The fact that they are adding a third year to the audit probably means that the examiner has already made up his or her mind, and is going to write a report saying that you owe additional taxes. It may be that your only chance will be in the Appeals Division (which usually gives a fair opportunity for a taxpayer to correct an error made by the examination division -- if you are in the right, do not miss your chance to present your case to an Appeals Officer) or in Tax Court. Good luck.
2006-11-27 18:51:19 · answer #1 · answered by Khemosabi's Ranger 2 · 1⤊ 0⤋
When was the 1099-C cut? While you may have defaulted in 2005 if the 1099-C was cut in 2008 you'd owe the tax for the 2008 tax year. The tax is due in the tax year that the debt was forgiven. This is very often a few years after the original default. If the 1099-C was cut in 2005 but was not the focus of the 2005 audit it's easy to see how it could have been overlooked. You might have a case if you were the subject of a Taxpayer Compliance Audit (which is a line-by-line audit of EVERYTHING on your tax return, and quite rare by the way) but if you were audited for something other than reported income you're stuck with the tax and the penalties and interest.
2016-05-23 09:58:24 · answer #2 · answered by Anonymous · 0⤊ 0⤋
First of all I would suggest that you have a professional such as an attorney or CPA handle the audit. This is a complex area that you need to detail why it is not a hobby.
You will need to show what makes it a business, separate bank account, separate books and records, consultants you have used , time spent, and many other items. It is not always critical that you have a profit but it is critical when describing the steps you have taken to make it a business.
Some of the items you described are problems that suggest that this is a hobby because you were lacking funds from elsewhere to keep this activity going. If it were truly a business you would have been looking to do things that would have made it profitable.
There are many tax cases that can give you guidance on what records are needed and what you can say that will prove your point that this is not a hobby.
Good Luck!
2006-11-27 02:53:07 · answer #3 · answered by waggy_33 6 · 1⤊ 0⤋
Contact the IRS tax payer advocate, the # is on the irs website. You might also want a sharp tax attorney. I went to www.lawguru.com for free legal advice, you can too.
Meanwhile, get all your papers in order to show your efforts to make a profit. Advertising costs and continuous promotion of your business helps substantiate that it is not a hobby. Get letters from your suppliers, your customers, etc to validate this is a true business.
Good luck
2006-11-27 02:58:58 · answer #4 · answered by upside down 4 · 0⤊ 0⤋
So long as your paperwork is together, and your taxes were prepared properly you should be OK.
However, I highly recommend contacting an Accountant and, if possible, an Enrolled Agent. They can discuss your exact circumstances and help you through the audit.
2006-11-27 08:29:47 · answer #5 · answered by nova_queen_28 7 · 0⤊ 0⤋
A double mortgage does not mean you were not making money at the business....it just means you were in debt with other obligations.
2006-11-27 02:51:14 · answer #6 · answered by xovenusxo 5 · 0⤊ 0⤋
Great point, I'd like to know more as well
2016-08-08 20:13:42 · answer #7 · answered by Anonymous · 0⤊ 0⤋