What to expect from an IRS farm audit
July 02, 2012
In a recent article for Fox Business, accounting expert and author Bonnie Lee noted that the Internal Revenue Service (IRS) often zeroes in on farmers. This is because income is not reported to farmers on W2s or 1099s, which makes it tricky to ensure whether it is accurately being reported to the IRS. Additionally, the IRS often considers farmers' approaches to bookkeeping to be insufficient, Lee notes.
After a farmer is selected for an audit, the auditor will request depreciation
schedules of the farm's fixed assets
, then tour the property to ensure each fixed asset
improvement listed has actually been carried out.
Fixed asset holdings can also be analyzed to potentially reveal other revenue sources. "For example, if a grape farmer has a cotton picker, eyebrows will go up," Lee writes. "If the farmer owns any large trucks, the auditor will wonder if hauling is another source of income."
Not declaring all sources of income on a tax return can be costly. For instance, singer Lauryn Hill is facing up to three years in jail after failing to file tax returns for 2005, 2006 and 2007, during which time her income topped $1.8 million.