IRS Notices Concerning CRP Payments

April 29, 2016

IRS is issuing “spot check” notices on CRP payments. 

IRS is issuing “spot check” notices on CRP payments. This does not appear widespread, but is of some concern to tax professionals, given the history of CRP taxation and court cases.   In the most recent case of Morehouse v. Commissioner,[i] the court issued a favorable position to the “non-farmer” participant enrolled in CRP.  IRS has chosen to non-acquiesce on the case and made it very clear in its October 13, 2015, Action on Decision that IRS would continue to pursue the issue:

We recognize the precedential effect of the decision in Morehouse to cases appealable to the Eighth Circuit.  Accordingly, we will follow Morehouse within the Eighth Circuit only with respect to cases in which the CRP payments at issue were both (emphasis added):

(1) paid to an individual who was not engaged in farming prior to or during the period of enrollment of his or her land in CRP and

(2) paid prior to January 1, 2008 (i.e., the effective date of the 2008 amendment to section 1402(a)(1)).

We will continue to litigate the IRS position in the Eighth Circuit in cases not having these specific facts. We will also continue to litigate the IRS position in all cases in other circuits.

Responding to the Notice

The IRS letter instructs the taxpayer to complete Schedule SE to determine the amount of SE tax due or to provide an explanation why taxpayer is not liable for SE tax.

If the client is receiving social security retirement  or  social  security  disability benefits at the time they received the Conservation  Reserve  Program  (CRP) payment(s),  the  amount  of  the taxable  CRP  payment(s)  can be “backed out” on Line b of the Form 1040, Schedule SE, based on a change in law beginning January 1, 2008.[ii] These payments are identified on the Form 1040 Schedule F, Line 4b or listed on Schedule K-1 (Form 1065), Box 20, Code Z.

The change in law beginning in 2008 DID NOT provide an exclusion with respect to all CRP payments or for CRP payments made to non-farmers.

The notices do not appear to be blanketing all in the CRP program, but IRS may be testing the waters to determine “compliance or non-compliance” concerning the issue.

[i] 769 F.3d 616 (8th Cir. 2014), rev'g 140 T.C. 350 (2013).
[ii] IRC § 1402(a)(1). 

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