Filing taxes and handling tax implications often present particular challenges to small business owners. These challenges can be exacerbated by the threat of a looming audit. In California and throughout the United States, some industries are particularly subject to the attention of the IRS, and one of these types of business is farming.
Primarily, farmers are audited because the IRS expects, and perhaps even assumes, that farmers don't accurately report income on W2s or 1099s. Without these forms and proof of income, the IRS has a difficult time being sure of what farmers are taking in. The IRS tries to be understanding of farmers' varying degrees of success, since farming is so closely connected with the weather, the national economy and other more or less unpredictable variables affecting profitability.
When farmers are audited, the first information sought by the auditor is likely to be the farmer's background and potential income. For an accurate representation of those aspects of the business, it is important that farmers accurately record how many hours they work, along with how much their spouses work if they work on the farm. Additionally, the auditor may look at depreciation schedules, grower statements, income records and crop maps. Many of these documents, such as a crop map, may be requested before the audit happens so that the auditor can reference industry averages.
California farmers facing tax audits may find that their interviews are a bit more in depth than the ones conducted with other business owners. The auditor may take a tour of the property, check livestock for sales, check the number of buildings and conduct a "structural analysis" of the farm in terms of its relation to other farms or companies. Tax audits for farmers involve more than simply handing over previous bank and checking account statements. It is important that farmers know their rights and responsibilities before and during an audit, and that legal assistance is also an option.
Source: Fox Business, "What Farmers Need to Know About Audits," Bonnie Lee, June 29, 2012