Form 8275

[Gretel]

The first time I will be filing this form. It's for a horse raising farm. I am confused about Part I, box a where it asks for a Rev.Rul., etc. The way I understand the instructions I only have to quote a Rev.Rul., etc. if I am opposing same.

But on top of this form it tells me to not use this form at all if the position is contrary to Treasury regulations.

I am not opposed to anything (as far as this issue is concerned), so do I need to enter something in box a?

Oh, by the way, ProSeries doesn't have the form available, now I need to mail this tax return in to make it REALLY stand out.

[Koss]

Form 8275

Why are you filing the form?

What is it about the return that makes you think you need the form?

[Gretel]

Why are you filing the form?

What is it about the return that makes you think you need the form?

Thanks for asking. I will outline some arguments against and for the taxpayer. Altogether I am not sure at all that we will have a more than 50% chance.....

Pro

1. Lifelong experience in racing horses
2. Runs successfully a plumbing business
3. Has all records of expenses and income
4. Land appreciation
5. Spends at least 30 hrs. at activity

Contra

1. Never made a profit (which is almost impossible due to ongoing drought here and now the ever rising prices for fuel and feed)
2. Is retired and farm loss offsets other income (we are not talking big number here)

[Koss]

Form 8275

Okay, so how many years has he been operating the business without turning a profit?

I have to admit that this is not an area that I am familiar with. Is there actually some sort of formal guidance from the IRS that states that after a certain number of years, there is a presumption that the taxpayer is not operating the business with a profit motive?

I certainly agree that after a certain period of time, the question of profit motive versus hobby begins to rear its head, and the risk of a full-blown audit starts to increase.

But I'm still not sure I really understand why you want to file Form 8275. It sounds like you want to shield the client from the accuracy-related penalty and yourself from the potential preparer penalty.

This may sound naive, but I really don't see how either one would be applicable. If the records of the expenses are rock solid, I don't see how the loss could be disallowed for any reason except the notion that it's not really a business. And that issue, to me, seems to be entirely qualitative, not quantitative.

If the IRS disallowed the loss, it might technically be a "substantial understatement" of tax liability, but I don't see how it could be characterized as a substantial understatement due to negligence or disregard of rules...

I know that the new penalties have everyone worried about this sort of thing. But I'm not sure that I would really want to flag a return like the one you're describing.

Which brings up another point. If you DO file the form, you can probably still file the return electronically, and mail the Form 8275 with a Form 8453 transmittal. Form 8453 still exists, and it is different from Form 8879. It is used, among other things, to mail in Form 8332 (release of the exemption by custodial parent) when the return is filed electronically. It is also used to mail in a substitute Schedule D in paper format. So there should be a way to tell your program that something has to be physically submitted after the return is e-filed. Maybe you should "bluff" the program by telling it that you are attaching a POA for the signature or something...

Maybe I'm just more risk-tolerant than most, and I suppose one also has to account for the level of risk tolerance of the client. But if the return you are describing were audited, and the business loss were disallowed...

First, remember that you can instantly "appeal" the decision of the examiner by requesting to speak with the examiner's supervisor, and procedurally they are required to honor that request.

If that didn't accomplish anything, I would have to let the client decide whether to concede the issue and agree to the adjustment disallowing the business loss. But I would not agree to an accuracy-related penalty or a preparer penalty.

I know a former IRS agent who recommends, that in this type of scenario, you take the position that if they will not agree not to impose the penalties, that you will proceed to take the entire case to appeals. When the penalties are not appropriate, this will often make them reconsider.

I just don't see how the business loss could be considered reckless, negligent, or fraudulent...

[Gretel]

Burton, Thank you so much. Your insights are very much appreciated. This client has at least 7 years of loss, 6 of which I have done the tax returns. I think I will not file the form for this year and require my client to develop a plan on how to get closer to a profit. The life for many farmers has become real tough in my area and lots of farmers who depend for their livelihood have farm losses.

As far as the e-filing goes: I looked over the list on form 8453 for the forms, which can be attached. Form 8275 in not one of them and I don't think I can just pick and choose what I want to attach.

Anyone else has an opinion?