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TAX help-- sold my horse three years ago and am dealing with IRS audit

Off Course
#1

Hi! Haven’t been a COTH poster in many years but am having a blast dealing with the IRS for a ~random compliance~ audit and am not sure how to handle the report of the sale of my personal horse in the audit year. Maybe someone here can help.

I purchased the horse in high school for $2000 and sold him five years later for $6500. He was my personal horse and my pet, and I did pay for a considerable amount of pro training/lessons on him over the course of five years to make him safer and more enjoyable for me to ride. How much exactly? Geez, I was not a great bookkeeper age 17-21, but I can make estimates.

I also paid a trainer $2400 to train and sell him for 3 months, and she was unsuccessful so I took him back. I did something similar with another trainer in the year prior… paid (~$1500) for training and consignment and they were also not successful.

I have the sales contract and sales check saved from the sale, but my accountant is concerned that the agent will try to say that I gained from the sale of the horse and I am not sure how to handle this because I invested a lot of money in the training and then attempted training/consignment costs.

Has anyone dealt with this before? I promise I’m not a crook if you are wondering why I’m being audited, just very, very unlucky, as my accountant put it. Thank you in advanced.

#2

appears you are a “hobby farmer”.?.. If the activity is a hobby the owner can deduct expenses only to the extent that the hobby generates income your case $6,500… you paid $2,000 for the horse then another $3,900 in training… that is $5,900 of your $6,500 before your costs to maintain … and assuming you are hobby once you have expensed the total $6,500 out you stop as you can not expense a loss as an individual.

Have you talked with an IRS agent about this? They normally are friendly, but be aware their success at answering random questions correct is about 2/3rds of the time being wrong

Were you 18 or older when you sold this horse? if less 18 than then there the “kiddie tax” to deal with

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#3

Very likely you need a tax accountant who is familiar with horses.

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#4

several years ago when i sold a horse that was my personal riding horse that id had for many years that was not intended as a ‘for profit sale’ , my tax guy said no need to worry and was not taxable income, especially as i could show that i had made no profit over the course of the years once you calculated the board/training/maintenance/upkeep etc of said horse. (if I recall the conversation correctly. i gave him all the details and he did all my taxes so im hoping it was all ok however he did it! :D)

#5

I’m pretty sure I would laugh in the tax man’s face if he thought I made a profit on that sale.

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#6

This sounds like an underreporter issue, meaning something was reported to the IRS that you never included on your tax return (you should’ve received a CP2000 notice with a proposed amount change.) If it wasn’t AUR then it was exam where they’re removing credits or adjusting tax. I would request your wage and income transcripts and account transcript for that year so you’re aware of everything that was reported to them and if it’s not adding up to your return that was filed.

There’s a lot that goes into the forms and schedules as far as right offs and expenses. I would find an accountant familiar with Schedule F’s and horses to see if some of the training can be written off or done as an LLC. A lot of the information can be found on IRS.gov as well.

Instead of calling the toll free line you can call the exam or AUR line. It should be listed on the letter you received or you can PM me.

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#7

As @TakeAChanceinVA pointed out, you’ll want to show the IRS with a paper trail that you spent 6.5K or more on the horse during your ownership.

Start with the biggest bills first if possible.

Do you have a receipt from the seller from whom you purchased the horse? If you don’t, can you contact them and get a copy?

Have you contacted the two trainers to see if they can provide you with copies of the training bills you mentioned?

Did you pay for any of your horse expenses with a check? Vet expenses, training lessons, show entry fees, farrier fees? I realize you probably didn’t save the receipts, but a copy of the cancelled check works too. Your bank statements should have images of the cancelled checks. If you didn’t keep your bank statements, you can obtain copies of the bank statements and the checks online.

Did you make any horse-related purchases with your credit card? Take a look at your statements to jog your memory. Credit card statements should also be available online if you didn’t save them. If you ordered any goods online with your credit card visit the vendor website, login to your account and print out a copy of the receipt. For example, when I visit my Smartpak account, I can find receipts from as far back as 2004.

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#8

How does the IRS even know you sold a horse?

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#9

Thanks for the responses!

Luckily I paid for almost all (95%) of horse expenses with checks, so I can go through my online banking to a certain year and request images of the checks.

So you can sell a horse and not claim as income? (Which is what I did. I filed my taxes on Turbo Tax that year and only reported all income that had a W2 with it.) When I told my accountant that $500-800 was spent a month on board alone for 5 years and I that definitely didn’t profit from owning him, he compared owning a horse to selling a car and said you wouldn’t consider oil changes and gas adding to the value of a car. I think we all know that it’s a little different with horses, but I’m not dealing with horse people.

I was 22 when I sold the horse, so I was an adult.

The IRS knows I received +$6500 for something because they have my bank statements. When you are audited, they look at every single deposit into your accounts to try to find sources of income that you are not reporting. My roommates Venmo-ing me money so that I could pay the utility bills was examined, as well as some clothes I sold on Poshmark for extra spending money because these all appeared as “+” in my account.

#10

Eh… On the face of it, I (who am the furthest thing from a tax expert ever) agree with the accountant on that. Board and routine vet/farrier care don’t really add value to a horse and the analogy to oil changes and gas is pretty appropriate.

Lessons/training and show expenses are different, because they do increase value.

What does your accountant say about the consignment costs ($2,400 and $1,500)? Those seem like a much stronger case for expenses that directly offset any profit than ongoing board costs to me.

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#11

You need a GOOD tax person, yesterday. Seeing some questionable advice. Possibly this included, I am not a tax practitioner, but worse case, I think you are looking at a capital gain (sale price-purchases price). you will need receipts for both. CG was/is taxed at a lower rate then ordinary income (ie salary/wages). Board, lesson, vet, equipment etc., I would NOT considerable deductible. Training IMO a grey area. Can you prove it improved the value of the horse? If you paid an agent a commission, that should be deductible. Cost of tax practitioner deductible on CURRENT taxes. Good luck

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#12

OP is going to need more then a good laugh. I found that having the CPA go into the audit with you go in there is vital in these things. If you don’t have one, get one.

Still wondering how the IRS knows you sold the horse? Typically they don’t care about amounts under 10k (which might be 12k now), Possibly did a trainer declare their commission or something? Are you sure you didn’t get something from the IRS regarding under reporting? Those can be missed if you aren’t careful, come in regular mail.

On the CPA, they are like a lawyer, they can represent you, regular accountant can’t. It is very similar to selling a boat, airplane or Classic car so the tax implications of any expensive hobby experience would suffice I should think. The best CPAs are those who used to work for the IRS.

When I was married we got audited 3 times in 2 years and the best defense, besides the CPA, is a pile of paper. The IRS loves paper, Go in with a big bundle of canceled checks, bank statements, your w2s, copies of sales contracts, board, training and consignment contracts vet and farrier bills. Prove your income and expenses.

You may very well end up owing them something plus a penalty but they usually drop the additional fraud penalties and possible legal action if you prove you spent the money on the horse and that you honestly did not know there was a tax liability.

In my case back then, we were running two small businesses, ex DH had a good income from primary job so we were prime targets. We learned the accountant we used was not registered or licensed so could not go in with us and that he had made a mistake on depreciating the value of a used horse trailer we restored. By providing a substantial amount of paper proof, we just had to pay the correct tax on the miscalculated depreciation plus a penalty. They dropped a boatload of misreporting , fraud and evasion charges and penalties. Think it was 119 mistake with 250+ in penalties assessed at the end.

Take away was know the difference between an accountant and a CPA and never go to an audit without a CPA. And never assume the old family friend, always used them, highly recommended jargon means they are any good or even currently licensed as a CPA.
.

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#13

Can you prove it improved the value of the horse?

appears to be easily proven as they bought the horse for $2,000 then sold it for $6,500… question to me is the OP a hobby or a business which changes things around somewhat

As for me none of our horses were not personally owned, my corporation owned them using the horses for advertizing… which made it very clear what was an expense and what was depreciable

In OP’s case they really need to talk with the IRS to see just where they are coming from then find a CPA that understands farm/ranch taxation… I wonder if the horse purchaser sent the IRS a 1099-MISC for $6500 which may have triggered this investigation … but they would have had to know their social security number to match the documents

the problem I see is we are concerned about $6500 that may or may not be income… worse case it is all income… so its about a thousand dollars if in 15% bracket… it may cost more to provide a defensible argument than accept the IRS settlement … you can get them to waive penalties… so you get to an offer status, then request a five or seven year payout

Really need to talk with the IRS agent to find out just what the agencies concern is

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#14

Just for general information…a 1099 form is like a W2 for income from sources other then your job, The person paying you money submits a form to the IRS just as your employer submits your wages to them. It proves they gave you the money so they can expense or deduct it.

Just wondering if there was a 1099 submitted by one of the parties involved in your sale…like buyer wanted it as an investment or business or either trainer acting as agent declared their commission on the sale??? IRS doesn’t really scrounge around without cause in random bank accounts looking for 6500 deposits then sending a tax bill on them. They don’t have the manpower or time even if they wanted to. I bet that sale was reported via 1099.

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#15

Did the IRS bring up the horse transaction? Did you report it on the return under audit? I’m just trying to understand why this is an issue.

Honestly, unless you got a 1099 for the sales proceeds OR you previously claimed deductions related to the horse OR you told the IRS, the IRS has no idea you got $.

You rec’d $6500, paid $2400 to one trainer, $1500 to another trainer, then paid for board, farrier, etc. I don’t see where you have any profit to be taxed. Yes, the $1500 was paid in a prior year, but I would add that to the cost of the horse.

Did you treat the horse activity as a business? If yes, then that’s a different story.

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#16

FYI–A CPA is qualified to opine on financial statements. A CPA does not necessarily know taxes. The CPA exam has a very small portion regarding taxes. Also, a “regular accountant” can be an Enrolled Agent without being a CPA and can represent taxpayers before the IRS.

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#17

I am confused. Did you deduct all your horse related expenses in the past on your taxes and claim the horse as a business?

If not how would it even be known you sold a horse at all?

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#18

What Findeight said. The IRS does not just audit for the sake of auditing unless something gets grabbed in the system for compliance or other. The IRS will audit when tax is not being correctly reported or credits are over stated. It’s more than likely when you sold the horse that a 1099 or similar was reported to us and it was never reported on your tax return for that year.

As I stated above, you should request wage and income transcripts to see EXACTLY what has been reported to us from outside sources if any. AUR has 3 years to go back into returns to check any compliance issues and such; if we have $6,500 of taxable income from a 1099 not reported we then send a letter with a proposed amount change and how to dispute the proposed change if you have/had expenses or if it’s a mistake. If you have documentation of all training and expenses (not routine maintenance and care as that does not depreciate or add to the animal from my understanding) submit it all in writing. The other poster was correct in stating to submit paperwork. Copies of checks written to trainer, receipts if received, boarding and training contracts, anything you have on the horse submit copies of.

You should also contact that department or agent to see what else can be submitted and if any holds can be placed on your account until you get your paperwork together. Good for hiring a CPA whose dealt with audits before. Hopefully this gets solved sooner rather than later.

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#19

There are four kinds of IRS Audits as explained nicely here:

http://www.irssolution.com/four-types-of-tax-audits/

In the last type you are randomly selected and must justify each and every line of your return. This is not a “random audit” but it is not necessarily triggered by any discrete event. I don’t know how the IRS selects the random taxpayer to be audited.

If you have a hobby you can deduct expenses to the extent of any income the hobby generates. So if you keep your horse as a hobby and win $1000 at a horse show you can deduct up to $1000 in expenses and they don’t need to be related specifically to that show. If you sell the horse you must declare the difference between the sale price and tax basis of the horse. The basis may be what you paid for the horse or maybe you can claim capital expenses. I’ve not researched this so I don’t know the specifics of what capital expenses might be recognized.

It sounds like you have drawn the Black Bean and are in that last audit type. Gather up all the information they ask for and present it as best you can. Don’t BS them. If you made a mistake you can admit it and it will likely cost you some interest and a monetary penalty. Never, as in NEVER, admit you “fudged” anything. If they can get an admission of “fraud” out of you they can go back and audit every return you ever filed (or at least back to the Statute of Limitations).

Consulting a tax professional (which I am not) would be a good idea. That way you will have the “latest and greatest” information on what you must, or must not, do.

Good luck in your dealings.

G.

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#20

Gather up all the information they ask for and present it as best you can.

For my audit of one of my businesses I had three suitcases…two of files and one of clothes … why the clothes was the question… well, unless we can come to an agreement then you will need to lock me up… oh, we don’t do that… well you did in the four federal prisons I worked on … after digging through the two cases of files we came to an agreement adjusting the demanded $55k down, waived all penalties and got to $2,700… and then when asked for the check… well, can we do a payment plan?? … set up a seven year payout… which was paid in full the next month … just had to see how far they would go

I do not advise anyone to do the same. they had just pushed me into a corner and there was no way out so I rolled over and played dead

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