IRS starts pilot program for auditing farmers’ Form 1040, Schedule F expenses

The Internal Revenue Service has started a pilot program for auditing expenses farmers claim on Form 1040, Schedule F, which is used to report farm income and expenditures.

The IRS said the pilot auditing program, which runs from April 2017 to April 2018, is in reaction to concerns that taxpayers may be deducting expenses on the wrong form, deducting expenses that actually belong to another taxpayer or deducting hobby losses. Only 50 audits are being conducted through the pilot program. After it is completed, guidance may be incorporated into the Internal Revenue Manual.

“We wanted our members to be aware of this pilot audit program,” said Irene Messmer, OFBF’s chief financial officer. “It’s important to be exact when completing Form 1040, Schedule F and supplying the necessary documents to support deductions.”

The IRS said that in the pilot program, taxpayers are being asked to provide documentation to show they qualify for the questioned expenses. In general, a taxpayer may deduct reasonable, ordinary, necessary and business-related expenses on Schedule F. Occasionally, the items being verified appear to be verifiable deductions, but they should not be on a Schedule F. For example, they are not deductible on the Schedule F if they are related to the taxpayer’s full-time, off-the-farm job, Schedule A or a corporate return. These cases may also have start-up costs or a hobby loss where enjoyment of the property is the main focus of the farming activity.

Specifically, the pilot program is asking auditors to closely examine the following areas: custom hiring, gasoline, oil and fuel expenses, mortgage interest, repairs and maintenance and supplies.