Usually, the IRS won’t even settle cases. Instead, it is necessary to go to IRS Appeals or U.S. Tax Court, where there are opportunities to settle a deficiancy claimed by the IRS. But there are also a lot of adverse rulings in Tax Court. And if the taxpayer has little income to show for the horse activity, offers of settlement are not as generous as in former years.
People who are in the startup phase (first 5 to 10 years) have a better chance of convincing the IRS that the activity is engaged in for profit, with the argument that more time is needed in order to turn a profit.
What often matters is objective evidence: It matters if the taxpayer has a formal business plan with substantive financial projections and cost details. As a taxpayer, you should be able to explain to the auditor how you intend to achieve a profit, and when you anticipate that will occur, as backed up by the business plan.
A business plan prepared in anticipation of an audit will do no good. The IRS will not regard this as a true business plan.
Nor will canned business plans with such statements as “It is our intention to raise the best horses possible, to accumulate the best mares, acquire stallions to breed, breed the mares, produce foals, and cull a portion of the foal crop and keep the remainder.” Simplistic language will not do. And only a detailed income and expense projection will pass muster.
It is not enough to simply have good records, consisting of a check register and copies of third-party documentation, such as bills, invoices, statements and receipts. Everyone is expected to maintain such records for use in preparing tax returns.
Individual records for each horse are desirable, with expenses for each horse and current and historical rosters for each horse.
The IRS will want to know about efforts made to breed and sell animals and, in the case of racing, to win purses. Advertising can take on many different forms, including showing of horses and attending sales and auctions where time can be devoted to promoting one’s program. But the IRS will want to see substantial concentrated advertising apart from horse shows.
In addition, the IRS will want to see evidence that the taxpayer sought or received financial advice from experts on the business end of the activity.
Advertising can take on many different forms, including showing of horses and attending sales and auctions where time can be devoted to promoting one’s program. But the IRS will want to see substantial concentrated advertising apart from horse shows.