Farrier

[erchess]

Have an audit coming up of a return prepared by another paid preparer who does not attempt to help with audits. Client is a Farrier (shoes horses) and I would love a link to the part of the IRM or whatever else that states what the IRS is looking for when it audits one of these people. Also any advice would be appreciated. I already know not to step in poo or get kicked by a horse.

[geekgirldany]

Only thing I can find is farm hobby loss, horse, etc

http://www.irs.gov/pub/irs-mssp/a1farmls.pdf

I can't find anything on Ferriers through the research materials I have. Maybe someone else will have something for you.

[Jiggers]

Blacksmith?

I would say this is just another normal service business.

All income reported.

All related expenses deductible.

Probably has mileage to travel to and from farms/race tracks.

Doesn't seem like there is anything out of the ordinary.

What are your specific questions?

[ChEAr$]

AGree

with Jiggers. Nothing extraordinary about a farrier. Heck, most people don't even know
the term. I had one once upon a time, but they are few and far between these days.

[JohnH]

I think you'd just need to use a little horse sense in preparing for the audit.

[BHoffman]

Have an audit coming up of a return prepared by another paid preparer who does not attempt to help with audits. Client is a Farrier (shoes horses) and I would love a link to the part of the IRM or whatever else that states what the IRS is looking for when it audits one of these people. Also any advice would be appreciated. I already know not to step in poo or get kicked by a horse.

Learned the hard way to get back if the tail goes up, too.

Any idea why the guy was chosen for audit? I had a client last year who went through an extremely thorough field audit because he filed a Sch C and also had EIC. IRS is especially interested in that combination.

[erchess]

More Details

First of all, I had assumed that he was being audited by the IRS but he is instead being audited by the NCDOR. However, he has been asked to bring his Federal and State Returns and all his supporting records. There is no official word in the letter on why he was chosen but neither is there a clear statement that this is random.

Here's the facts: His wife has a good paying job and he has a job that pays well relative to the time he says he works it and that he says would like him to work more. They have a pretty basic Sch A with Medical (but not enough) Mortgage Interest on a 1098 as well as taxes and charitable contributions for which I have not yet run across documentation - but there is a great deal of documentation I have not yet been through. Those would be penny ante issues though because most of the A is the mortgage interest. He has residential energy credits from putting storm windows and doors and insulation in his house. Remember this is his 2006 return so those were ok. He has a loss on his business as a Farrier but over half of the expense is depreciation. He is mobile and he services horses for two major clients who gave him forms 1099 and required that he keep logs of the horses he shod. One of these clients I believe worked him monthly and the other worked him four days a week. He also ranged over a multi State area going to events, some for continuing education and some offering opportunities to work.

I personally think he was audited because someone wants to argue that he has a hobby rather than a business. I think when they see that the problem was depreciation that will go away. However, I am concerned that he does not have a mileage log as such. He keeps track of how far he drives his truck each year and just looking at it, well it in my opinion isn't any more suitable than a cement mixer for personal use. When it was bought it was a heavy pickup truck weighing over 6K pounds and seating four. He has had mounted on the back a huge stainless steel box with doors on the three sides that open to expose and in some cases let swing out such things as his 250 pound stainless steel anvil and an iron bending machine. He must have a thousand horse shoes. He also has documentation that he went here and there on specific dates and shod horses - and for the two big clients even documentation of which horses. I haven't gotten into the issue of how much of his cell phone should have been deducted but he pays $100 a month for an unlimited plan and I don't off hand remember how much of that was deducted. If all of it was then I will be prepared for a correction of that. We all know that the law is that when someone he is working for or may in the future work for talks to him on his cell phone, that's deductible but that when friends and family or really anyone who is not going to hire him talks to him that's personal. I haven't raised the issue with him yet but if he's like most of my clients he will be hard pressed to understand why all cell calls while he is at work or going to or from work are not business calls since he is sure he would not have the cell phone if he did not need it for work.

[JohnH]

It's very unusual for NCDOR to initiate an audit due to Schedule C issues, since that info isn't even disclosed on the NC return. I doubt NCDOR is going after hobby losses, even though that certainly may come up during the course of an audit. Is it possible that NCDOR is trying to determine if he should be collecting sales tax or pursuing some other related issue? Or perhaps the energy credits caused his return to be selected - are they very large? Just guessing here...

[erchess]

Sales Tax

Under what circumstances should a Farrier collect sales tax? I don't know if he bills separately for shoes and labor similarly to what a mechanic would normally do. I do know that he does not collect sales tax.

[JohnH]

I'm just grabbing at straws because I just don't think the Schedule C prompted the audit.

Sales tax is something that comes up frequently on a third-party basis. For example, one of his customers is being audited (maybe for sales tax compliance themselves) and the auditor notices an invoice from your client that shows materials but no sales tax billing. So the auditor refers your client back to NCDOR for follow-up on sales tax compliance. They will often tell you that's the source of the audit if you ask them.

My other thought was that the energy credit may have triggered the audit, since it is a separate item on the tax return. Was the credit very large? If so, then that's probably what they are loooking at.