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

[trotrotrot]

Thank you for the detailed responses.

@Guilherme got it right; the IRS does not know I sold a horse and that is not what triggered the audit. The audit is a compliance audit which was most likely triggered by an error that I made on my return (which did not result in me owing anything more or less and was a reporting error, reported MSRP value of year-end business inventory and not cost value) which was corrected months before notice of the audit. As it was explained to me, the IRS randomly selects returns for this type of audit when they decide that it is likely that there are more mistakes to be uncovered… so I was selected from this pool.

The agent is going through my personal bank statements and wants to know what every single deposit into my account is, so I have to explain the +$6500 = horse sale since she asked what this deposit was. I’m a little blindsided by this because I prepared to back up every single penny spent on my business that year, and didn’t even remember that I sold my horse until asked to justify the +$6500. My accountant has worked with this agent before and said that she is just super meticulous, and if we keep giving her info that she requests without an attitude that she will be reasonable.

So far the audit is resulting in the IRS making minor adjustments in my favor, so I want to be prepared if the agent sees an opportunity to turn the tables.

My horse was my pet/hobby when I was a student. I did not participate in any activities where I made money from him, and we did not partake in activities where I won prize money. Horse expenses were never claimed in any prior taxes. My current self-employment is in fashion retail and has nothing to do with horses.

Thank you for all of the advice though. This is very annoying and a big waste of everyone’s time and money (mine and the government’s), and I look forward to it being concluded.

PS. My accountant is a CPA and has been dealing directly with the IRS agent without me. He was also the one who corrected the mistake on my return for me so he knows my business finances up and down. I like him very much and he knows how to work with this specific agent which I think it helpful, just has never had a client with a horse sale.

[trotrotrot]

If anyone is wondering how this turned out, the horse sale was not a big deal regardless of whether or not it was a “profitable” sale because (I hope I’m saying this right) my overall income did not exceed the un-taxable capital gains limit. I think if I had sold the horse for $10k+, I’d have had to justify sale.

Overall, the IRS ended up owing me money in deductions I didn’t know to take, (it was my first and last attempt at filing with Turbo Tax, ugh), and the audit ended in my favor as a “no change”. Lost $1500 to my accountant though, and killed a few trees along the way from all the papers I printed.

[LaurieB]

Thanks for the update! At least you learned some things and came out the other end almost whole. So that’s all good.

[babecakes]

ie: thanks for the update!

[Palm_Beach]

What a relief!!! So they owed you money, but called it “no change” and did not refund you your money?

[Callista17]

Where did she say she didn’t get a refund?! What she did say was her accountant charged her up the river. Lol
Glad you learned some information.

[WildLittleWren]

Thanks for the update and good info for others!

[trotrotrot]

@Palm Beach

What a relief!!! So they owed you money, but called it “no change” and did not refund you your money?

Yes, actually. I don’t remember the exact amount (under $250) but my accountant agreed going into it to negotiate it as a no-change. He had an idea of the deductions I didn’t take going into it and our strategy was to not piss off the IRS lady and be overly accommodating to end audit ASAP.

And yes, if you’re an ammy and sell your horse, keep all the papers! Just in case you get unlucky like me. :ambivalence:

[Palm_Beach]

I think the money on the accountant was well spent. OP is not in jail, right!!! We’d have to put together a cookbook and sell it to raise bail money for her!

[pony_grandma]

@Halt Near X

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.

I don’t understand why the cost of keeping a horse is not included in the value with a sale and tax consequences. Any normal income endeavor is allowed to deduct all costs of material and labor.

And I seem to remember somewhere in the past that a hobby horse person was allowed two sales?

[clanter]

@pony grandma

And I seem to remember somewhere in the past that a hobby horse person was allowed two sales?

never heard of a body count as I have always been told by my advisers the IRS is looking for any income a person may have had during the tax period

The IRS wants you to declare all your hobby income, even if it’s a small amount of money. If you file your taxes using From 1040 you’ll typically report your hobby income on Line 21, labeled “Other income.”

I could be incorrect but that is why I use a CPA rather than an online computer program for my taxes, at least my CPS will represent me if needed, my stupid computer would just look at me

[OneTwoMany]

@pony grandma

I don’t understand why the cost of keeping a horse is not included in the value with a sale and tax consequences. Any normal income endeavor is allowed to deduct all costs of material and labor.

Agreed. Even if the endeavor is determined not to be for profit, the tax filer can deduct expenses up to the amount of income the horse generated (in this case, $6,500)

https://www.irs.gov/newsroom/is-your-hobby-a-for-profit-endeavor

[davidhanes]

And after all, if you’ll decide to pay taxes on the income from the hourse selling, you can fill out W2 form online on https://fillable-form-w2.pdffiller.com/ as it has everything you may need for creating a correct document.

[BlueDrifter]

This is an eye opener for me, for sure. You mean all those horse-selling folks on Facebook have to report income?

If I bought my pet horse as a weanling (less money) and sold him as a trained 10 year old (more money), I would have to report that income, but not be allowed to deduct any of the costs of raising him up that warrants his increased value (vs being a 10 year old unbroke pasture pet)?

Do garage sale people have to report income if they deposit that cash in a bank?

(Obviously time for me to read up on this, lol…)

[meupatdoes]

@trotrotrot

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.

I don’t understand why your accountant, whose job this is, can’t explain to you how the consignment and training fees, plus ongoing care expenses should be treated to effectively negate any income from the sale of your equine asset.

ETA: I’m glad to read the update that your accountant did just fine and represented your interests quite competently without requiring any help from COTH. :lol:

[meupatdoes]

@BlueDrifter

This is an eye opener for me, for sure. You mean all those horse-selling folks on Facebook have to report income?

If I bought my pet horse as a weanling (less money) and sold him as a trained 10 year old (more money), I would have to report that income, but not be allowed to deduct any of the costs of raising him up that warrants his increased value (vs being a 10 year old unbroke pasture pet)?

Do garage sale people have to report income if they deposit that cash in a bank?

(Obviously time for me to read up on this, lol…)

Did you read Guilherme’s post?
He indicated that as a hobbyist you can deduct expenses up to the sale price of the horsr.

There are also long term capital gains things you can take advantage of for a lower tax rate.

Ask an accountant before you cash a big check.

[meupatdoes]

@davidhanes

And after all, if you’ll decide to pay taxes on the income from the hourse selling, you can fill out W2 form online on https://fillable-form-w2.pdffiller.com/ as it has everything you may need for creating a correct document.

Stop before you hurt yourself.

A W2 is the completely wrong form.
OP is not on her sale horse’s payroll.

[OneTwoMany]

@davidhanes

And after all, if you’ll decide to pay taxes on the income from the hourse selling, you can fill out W2 form online on https://fillable-form-w2.pdffiller.com/ as it has everything you may need for creating a correct document.

A W-2 is not used to report income from selling a horse. A W-2 is the form an employer issues to an employee to report annual compensation.

https://www.investopedia.com/terms/w/w2form.asp

[OneTwoMany]

@BlueDrifter

This is an eye opener for me, for sure. You mean all those horse-selling folks on Facebook have to report income?

If I bought my pet horse as a weanling (less money) and sold him as a trained 10 year old (more money), I would have to report that income, but not be allowed to deduct any of the costs of raising him up that warrants his increased value (vs being a 10 year old unbroke pasture pet)?

Do garage sale people have to report income if they deposit that cash in a bank?

What “horse-selling folks” are supposed to do and what actually happens can be two different things. Audits happen. If one doesn’t report sales income from a horse on their tax return, an audit can turn up the income and the taxpayer will need to show there were expenses against that income or pay tax on the income.

Just to be clear. A horse owner is allowed to deduct the cost of buying/training/keeping a horse against the income the horse generates when sold.

Here is a link that answers your “garage sale” question:

https://www.irs.gov/businesses/small…uction-sellers