Horse Farms and Tax Gaps—Is Increased Tax Enforcement on the Way?

internal revenue serviceThe incoming administration may pursue taxes differently than the previous administration.


The federal budget deficit reached an all-time high of $3.1 trillion in 2020. The deficit has soared during the pandemic, with the current figure three times higher than the 2019 deficit of $984 billion. At the same time, the tax gap (the estimated difference between taxes owed and taxes paid) is over $500 billion. Recently, the Congressional Budget Office (CBO) delivered a report with strategies for reducing the deficit. One plank of the plan is to boost funding to the Internal Revenue Service (IRS).


The capabilities of the IRS have declined along with its budget over the last decade. Fewer budget dollars mean less staff and resources for civil audits and criminal tax investigations that could return the kind of money needed to reduce the tax gap. Strapped for cash, the agency has reduced its investigation into the tax fraud around big ticket schemes and high rollers. Notes former IRS commissioner Natasha Sarin, “The I.R.S. doesn’t have the resources it needs to go after the big fish. That puts undue burden on everyone else.” Some of those bigger fish also use horse farms as a tax write-off, frequently spurring the interest of the IRS.


According to a piece in The New York Times, the IRS has deferred higher-resource consuming investigations in favor of verifying eligibility for those claiming tax-credits. Interestingly, the article also notes career personnel with the IRS have more experience with individual income audits and “C” corporations, than with more complicated partnerships or “S” corporations. One retired IRS agent states, “The I.R.S. does not like to do partnership returns. The law can be quite complex, and most folks who grow up within the service grow up auditing individuals and corporations, doing very little if any partnership work.”


Because our tax attorneys work daily with compliance issues, offshore tax issues, and criminal tax defense, enforcement trends of the IRS have our rapt attention. In addition to increasing the budget for IRS tax enforcement, the CBO report makes suggestions that include:

  • Increase the corporate income tax rate by one percent and increase individual income tax rates
  • Raise tax rates on long-term capital gains and qualified dividends by two percentage points
  • Eliminate itemized deductions, limit deductions for charitable giving
  • Change tax treatment of capital gains from sales of inherited assets
  • Expand the base of the net investment income tax to include income of active participants in S corporations and limited partnerships


And the list goes on. We’ll be keeping on eye on incoming changes at the IRS and the Tax Code. If you have a question about a potentially false tax return, tax considerations for “C” or “S” entities—or the suitability of your horse farm as a tax vehicle, speak with an experienced tax lawyer for answers.


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Our legal team at Robert J. Fedor, Esq., LLC provides seasoned advice when you are faced with tax or financial challenge. We serve clients nationwide and abroad from offices in Chicago and Cleveland. Contact us today or call 800-579-0997.


Understanding Tax Fraud