The Internal Revenue Service could be doing more to identify and examine taxpayers who may be deducting hobby losses to offset their actual income, according to a new report.
The report, from the Treasury Inspector General for Tax Administration, found that the IRS’s methods for identifying high-income taxpayers who may be offsetting their income with hobby losses do not maximize the use of all the relevant taxpayer information available to the IRS. When tax returns containing potential hobby losses are selected for audit, the examiners do not always address the hobby loss issues, according to the report.
TIGTA’s evaluation of IRS data from processing years 2011 through 2014 identified 9,699 individual returns from tax year 2013 that claimed a Schedule C loss of at least $20,000, gross receipts of $20,000 or less, and reported wages of at least $100,000. The taxpayers also reported losses in four consecutive years, for tax years 2010 to 2013. TIGTA’s review of a statistically valid sample of 100 tax returns determined that 88 of the returns showed an indication that the Schedule C businesses were not engaged in for profit. TIGTA estimates that 7,511 returns in the total sample population of taxpayers may have inappropriately used hobby loss expenses to reduce taxes by as much as $70.9 million for tax year 2013.