Q: What can I do to ensure the IRS doesn’t improperly use the FSR to deny cash accounting to active agricultural producers?

A: The most important thing you can do is to contact your U.S. Senator and U.S. Representative to let them know about your concerns. If our elected officials aren’t hearing from agriculture, they will assume that this IRS action is not a big issue. In addition to contacting your members of Congress, consider joining Farmers for Tax Fairness and providing financial support for our efforts to identify and contact agricultural producers who will be affected by this proposal.

Q: Can the IRS use the FSR to go after active farmers today?

A: Yes. The IRS lost its lawsuit against Burnett Ranches at the district court level. They then appealed that loss to the 5th Circuit Court of Appeals, where they again were rebuffed. After considering the issue for two years, they then came out with an ‘action on decision’ letter which outlined their views on the Burnett decision. In this document, they state that “we disagree with the decision of the court…and therefore will follow it with respect to cases within that circuit… We do not, however, acquiesce to the opinion and will continue to litigate our position in cases in other circuits.”

This means that, for any agricultural producer who operates outside of the 5th Circuit (Texas, Louisiana and Mississippi)

Q: Who is at risk of IRS action on FSR?

A: This rule can be used to deny cash accounting (and seek back taxes, interest, and penalties) to any farming entity that can allocate more than 35 percent of its losses in a year to limited partners UNLESS those limited partners are actively engaged in farming and own their farming interest directly. If an operation fails to meet these criteria, they could be a target, particularly if the operate outside of the states of Texas, Louisiana, and Missouri.

Q: Am I safe if I’m a smaller operation with few owners?

A: Not necessarily. Size is not a determining factor. In Burnett Ranches, the defendant was a single business owner who actively managed her farming operation, but she did so by owning 99% of a Subchapter S corporation that, in turn, owned the LLP farming operation. The IRS continues to allege that the defendant should not have used cash accounting because she was not a direct owner of the LLP.

FAQs are included as examples only. The effects on individual taxpayers of IRS action on this matter may vary. Taxpayers should not use the information in these FAQs as tax advice and are encouraged to seek assistance from their own Certified Public Accountant or attorney prior to making specific business or tax planning decisions.

In the News

Farmers for Tax Fairness Applauds House Tax Reform Bill

Bill Does Not Restrict the Ability of Farmers and Ranchers to Use Cash Accounting (Nov. 2, 2017) – Farmers for Tax Fairness, a national coalition of farmers and ranchers, today applauded the U.S. House of Representatives for not restricting the use of cash accounting...

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