TIGTA: Improper hobby losses often overlooked
The IRS is missing opportunities to flag and examine returns that inappropriately use "hobby losses" to offset other income, the Treasury Inspector General for Tax Administration (TIGTA) said.
In an audit, TIGTA selected tax year 2013 individual returns in which taxpayers:
- Reported wages of $100,000 or more;
- Included a Schedule C, Profit or Loss From Business, with gross receipts of $20,000 or less and a loss of $20,000 or more; and
- Had reported losses in each of the three previous consecutive years.
Of the 9,699 returns so identified, TIGTA analyzed a statistical sample of 100 returns, of which 88 showed indications that the Schedule C activities were not being engaged in for profit. The IRS had selected for examination 409 of the nearly 9,700 returns TIGTA selected, but for none did the IRS give a suspected hobby loss as a reason for its audit.
The IRS agreed with TIGTA's recommendation that it use its research capabilities to identify high-income individual returns with Schedule C losses for multiple years to identify improper hobby loss deductions.
In a similar audit in 2007, TIGTA estimated 1.2 million taxpayers may have used hobby losses in 2005 to underpay as much as $2.8 billion in taxes.
Treasury cracks IRS impersonation phone scams
Treasury agents arrested five people in Miami on May 23 allegedly involved in schemes to impersonate IRS agents in telephone calls to obtain money from victims by falsely stating the victims owed taxes or fees, TIGTA said.
The five, all Cuban nationals, according to news reports, were charged in federal complaints filed in Arkansas, Minnesota, and Texas with wire fraud and conspiracy to commit wire fraud. They defrauded more than 1,500 victims of nearly $2 million, often by threatening them with arrest if they did not wire money immediately, court documents stated. TIGTA estimates $36.5 million has been stolen from 6,400 victims in these and similar schemes.
Automatic method changes updated
The IRS updated the list of automatic changes in accounting method to which the automatic change procedures in Rev. Proc. 2015-13, as clarified and modified by Rev. Proc. 2015-33, and as modified by Rev. Proc. 2016-1, apply (Rev. Proc. 2016-29).
The new revenue procedure applies to Forms 3115, Application for Change in Accounting Method, filed on or after May 5, 2016, for a year of change ending on or after Sept. 30, 2015, that is filed under the automatic change procedures of Rev. Proc. 2015-13. The changes covered include those from incorrect to correct depreciation methods and a wide range of method changes, including those related to the final tangible property regulations issued in 2013 and 2014 (T.D. 9636 and T.D. 9689).