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R. Klein, EA
R. Klein, EA, Enrolled Agent
Category: Tax
Satisfied Customers: 3374
Experience:  Over 20 Years experience
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IRS is auditing me, says my business did not make a profit

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IRS is auditing me, says my business did not make a profit in past 7 years up to 2011. Reason I did not make a profit is because i did my tax wrong (thanks turbotax) and filled out deductions on Schedule C.


They say they are disallowing my "schedule c deductions" even though I amended by return and put deductions on schedule A . . . what do you suggest I do???

Randalltax : Thank you for contacting me about your Tax issue. I will work hard to help you understand the issue clearly.
Randalltax : first, it is always recommended that you hire someone to represent you. I understand it is costly, but often worth the money and reduction in aspirin needed.

Hi, you answered my questions before, how are you doing?

Randalltax : the IRS can disallow business losses if there is no evidence of a real effort to have a profit. The general yardstick is that a genuine business should have a profit 3 out of five years.
Randalltax : if not, the IRS assumes your activity is a Hobby, and therefore will not allow losses against ordinary income.

yes, I know that . . . reason I didn't have profit was economy was bad (I'm in realestate) and I pay a lot of property taxes on vacant land I own.

Randalltax : you would need to prove that you have a long term profit motive and a plan for profitability within a reasonable time frame
Randalltax : thersfar ethers aroblem right there.
Randalltax : you cannot deduct property tax on vacant land typically
Randalltax : thattypically that is added to your cost basis and is capitalized

yes, I held the property for long-term investment hoping economy would get better but it didn't now I'm stuck paying thousands of dollars in property tax on vacant land i can;t sell . . .


we discussed this before, i'm NOT a dealer but an investor


investors do not capitalize, there is no way i could stay in business if I capitalized

Randalltax : Raw land doesn't matter if you are an investor or dealer. Treated the same.
Randalltax : Sounds like IRS is disagreeing with you as we'll
Randalltax : Sorry for typos....iPad keeps changing my words

irs is not allowing any of my expenses

Randalltax : Hobby versus profit motive is usually where they start.
Randalltax : you really need representation.

i talked to other CPAs and they all say i can deduct property taxes if I'm an investor


not a hobby, i make a living at this

Randalltax : if you don't get the results you want in the first level of audit, you have the right to an appeal.
Randalltax : a
Randalltax : appeals officers are generally more knowledgeable in tax law than front line exam

i have one on appeal (just filled out form) and one in tax court

Randalltax : i have a lot of experiences in dealing with exam agents that make up their own law that appeals officers just ignore.

okay, thx, this is real nightmare I think if i could just meet someone face to face and explain it . . . the mistake.


mistake of reporting expenses on schedule C rather than A

Randalltax : is yours a correspondence audit?
Randalltax : if so, you can request an office exam
R. Klein, EA and 2 other Tax Specialists are ready to help you