Schedule c losses and amending

[taxgirl]

I have a client that has substantial schedule c losses - $30,000 - $40,000 every year. I have advised of IRS's stand on profitability etc. We discovered an error in 2013 which will result in an even larger loss (original filing (12,000) approx. and amended filing will be (40,000) approx. I do feel this t/p is in it as a business and meets the other criteria. My question is... If we amend, are we opening ourselves to an examination (which probably isn't far away)

[Burke]

Could be. How many years has this been going on? Are the losses being generated by depreciation, perhaps Section 179?

[New York Enrolled Agent]

. I do feel this t/p is in it as a business and meets the other criteria.

What you feel might not be enough.

$30-$40K loss every year (your words) makes me wonder. Have you researched the nine factors in the income tax regulations for §183?

[taxgirl]

Losses have been going on for too long - 9 years and it is not due to depreciation. He is a professional angler. I have looked at the regs and feel that his situation checks all the boxes but as was stated, what I feel isn't necessarily what an agent may feel.

[taxgirl]

Losses have been going on for too long - 9 years and it is not due to depreciation. He is a professional angler. I have looked at the regs and feel that his situation checks all the boxes but as was stated, what I feel isn't necessarily what an agent may feel.

[Black Bart]

Although I once knew a small farmer who claimed an approx. $2,500 loss for twelve consecutive years with nary a ripple from the bogeyman, I don't think I'd tempt fate with a background like this guy's (assuming taxgirl's "9 yr." timeframe is right). On the other hand it's been my experience that IRS is not particularly interested in returns showing a loss (unless it's a loss in the gross - which once got me and an Amway lady slapped right quick). Nevertheless, a long stretch of $30-$40K might be enough to get their auditing juices flowing, so I don't think I'd do a 1040X. I believe amended returns are checked more often than normal returns (can't speak for others' opinions), which I'm thinking is because they're begging for special scrutiny. A solid string of outsized minuses might be quite interesting to a zealous agent.

It makes you wonder - "how much is enough" for your guy? And maybe...whether you should let sleeping dogs lie.

[New York Enrolled Agent]

Losses have been going on for too long - 9 years and it is not due to depreciation. He is a professional angler. I have looked at the regs and feel that his situation checks all the boxes but as was stated, what I feel isn't necessarily what an agent may feel.

Clearly, this is an OPINION. I do not have any substantive facts before me but based on what you post, I'd be very surprised if your client could satisfy any of the factors from 4 through 9 in his favor.

[taxgirl]

Thank you. I appreciate all the input.

[DaveO]

It would seem there would significant personal enjoyment derived from this. I have a Bass Tournament Fisherman for whom I have always reported on Line 21. Of course we are only talking a few thousand $ per year. Can't think the IRS would want to see a $30k bass boat on the depreciation schedule.

[Lion]

Go through the nine factors. This sounds a lot like a hobby. If so, educate your client. If they won't be educated, fire them. It's not worth your license.

I had to have that discussion with an artist client last year. She realized it's her hobby based on our discussion. So, we've been reporting it that way.

[Roland Slugg]

... based on what you post, I'd be very surprised if your client could satisfy any of the factors from 4 through 9 in his favor.

So would I, and I would add factor #1 to that list. And the few factors he might be able to pass, if any, are trivial in importance compared to the ones he would fail to pass.

Angling by definition is sport fishing. Maybe he enters a few tournaments every year, and his winnings serve to justify, in his own mind, that the entire activity is, somehow, a "business."

IMO the T/P would be a fool to file an amended return claiming even more expenses.

There is an ever bigger concern that I believe you should think about. If the situation is as big a sham as it appears, then YOU as the tax preparer may be at risk of being hit with penalties under Code §6694, relating to an "unreasonable position," or "willful or reckless conduct."

[AZ-Tax]

Acquired a client with 9 years of Sch C losses

A couple years ago I acquired a client who had 9 years of Sch C losses none generated by any depr. In fact, the TP had losses every year since the Sch C business started. All those years a local CPA prepared the TP's tax return. Thankfully for me the first year I acquired TP, TP closed the business down the tax year previously. In my opinion, this had intentional losses all over it due to the spouse was making over $200K a year in a salary position.

[Burke]

I had the same situation with a Bass fisherman. He took a loss the first year, when it was his full-time activity (he had no other job -- and thought he could support himself on this alone.) After that, he decided (maybe it was his wife who was still working who decided) that he needed another vocation. After that, we treated it as a hobby, following a discussion of what a business was and was not in the eyes of the IRS. I cannot imagine how this client is getting away with 9 years of these huge cash losses. Have you had the "what-are-you-living-on" discussion? How is he financing this activity? If he has losses in the $30 - $40K range, what is his gross income?