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.
- Use IRS research to identity high income taxpayers with multi-year Schedule C losses
- 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