Audit Activity for Individual Taxpayers Deducting Hobby Losses May Increase

An April 12, 2016, TIGTA report may result in more audits of “hobby loss.”  The audit was a follow up to a 2007 study to discover if IRS had improved its Form 1040 Schedule C loss audits resulting in an overall loss of revenue to the government.  Years 2011-2014 were reviewed and the findings identified high income taxpayers who may be offsetting income with “business losses.”  Generally a business must show a profit in three out of five years or the burden of proof falls to the taxpayer to prove the “business” is a legitimate profit motive enterprise or IRS may deem it a “hobby.”  The overall estimated loss of income to the government was estimated at $70.9 million for the tax year 2013.

Two recommendations were made and IRS agreed to both suggestions and plans to take corrective action.

  1. Use IRS research to identity high income taxpayers with multi-year Schedule C losses
  2. Emphasis the importance of requiring filing checks when making the initial determination to audit the return for “hobby loss” issues

You can read the full report at:   https://www.treasury.gov/tigta/auditreports/2016reports/201630031fr.pdf