Your odds of being audited go up with your income. A real estate professional I know was audited and the IRS claimed he didn't materially participate in a business. We both thought that was garbage considering the circumstances, so he fought it, and ended up losing.

Good luck!

No idea. I'm a full time employee and W2'ed, so I'm definitely a material participant.

BCOBQ98 said:

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Anyone know how strict the IRS is about checking for this? Has anyone been audited and asked to show evidence that they materially participate? Does the IRS look to see if any other shareholders are claiming this status?

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I think it would depend on the dollar amounts involved. If one of the shareholders is in an argument over material participation, I would think the agent would want to find out about the participation of others.

It has been my experience the examiners are pretty incompetent all in all, even those in the LB&I who are supposed to be at a higher ability. They will focus on one thing and completely let other things go past.

The biggest situation I was ever involved in (wound up going to Tax Court but settled when I found where the agent falsified some numbers in the documents submitted and when their economist accidently helped prove our case) did not involve material participation per se, but did involve participation. There were two owners originally involved in the business with the third owner, but those two moved away, yet still drew paychecks. Those two moved pretty far away and the only real way for any communication was by phone (back before the internet). They requested phone records of all three guys and of the company, to see how often calls took place and it wasn't anywhere near what they had been told!

The best defense would be to have some sort of contemporaneous records of participation. Things noted even in a pocket notebook or on an app on the phone can go a long way. Even though it might not be much, almost any attempt like that can make them go away, or go on to something else. Had guy and gal who were ranchers and one issue was auto usage. No records to speak of were kept, and the agent challenged claiming 100% on both. The husband had a pocket calendar on which he noted how many bales of hay he hauled to each property (they had four large tracts of land), or how many cows he hauled to auction from which property. Short and sweet. But contemporaneous. Soon as the agent saw that he said how about 100% on one and 98% on the other, lol.

LOYAL AG said:

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FattyDelights said:

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God I hate the IRS.

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Don't hate the IRS, hate the tax code which means you should hate Congress. The IRS has a job to do and it's to enforce a disaster of a tax code that's often not even about taxes as much as it is about controlling your behavior. So much of their job is enforcing rules Congress implemented to push you to do things they think you should do such as buy a house, send your kids to college, save for retirement (but not too much), give to charity, have health insurance (the right insurance and not too much of it).

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Not sure I'd go that far. The commissioner gets to write regs to interpret all that crap that Congress made law. Especially with hastily passed laws like the 2017 reform, the IRS gets to basically make up the rules they're enforcing.

LOYAL AG said:

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FattyDelights said:

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God I hate the IRS.

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Don't hate the IRS, hate the tax code which means you should hate Congress. The IRS has a job to do and it's to enforce a disaster of a tax code that's often not even about taxes as much as it is about controlling your behavior. So much of their job is enforcing rules Congress implemented to push you to do things they think you should do such as buy a house, send your kids to college, save for retirement (but not too much), give to charity, have health insurance (the right insurance and not too much of it).

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100% of Congress has no idea what all ticky tacky provisions exist in the tax code. None of them. It takes a collegiate degree plans to understand and practice just small fractions of it. Im glad we got some marginal rate breaks last year, good for us, but its still an abject disaster.

JSKolache said:

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LOYAL AG said:

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FattyDelights said:

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God I hate the IRS.

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Don't hate the IRS, hate the tax code which means you should hate Congress. The IRS has a job to do and it's to enforce a disaster of a tax code that's often not even about taxes as much as it is about controlling your behavior. So much of their job is enforcing rules Congress implemented to push you to do things they think you should do such as buy a house, send your kids to college, save for retirement (but not too much), give to charity, have health insurance (the right insurance and not too much of it).

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100% of Congress has no idea what all ticky tacky provisions exist in the tax code. None of them. It takes a collegiate degree plans to understand and practice just small fractions of it. Im glad we got some marginal rate breaks last year, good for us, but its still an abject disaster.

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Every member of Congress should have to take a test over every major piece of legislation they pass. Those who do not pass the test lose any pension or health care benefits for the remainder of their term. Then, just to make it interesting, put some white marbles, red marbles, and blue marbles in a hat. Those that draw a white marble get another chance. Red marble they lose their seat and we fill them with a special election. Those that draw a blue marble get executed. There is no excuse for them not knowing what they vote on.

JSKolache said:

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LOYAL AG said:

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FattyDelights said:

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God I hate the IRS.

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Don't hate the IRS, hate the tax code which means you should hate Congress. The IRS has a job to do and it's to enforce a disaster of a tax code that's often not even about taxes as much as it is about controlling your behavior. So much of their job is enforcing rules Congress implemented to push you to do things they think you should do such as buy a house, send your kids to college, save for retirement (but not too much), give to charity, have health insurance (the right insurance and not too much of it).

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100% of Congress has no idea what all ticky tacky provisions exist in the tax code. None of them. It takes a collegiate degree plans to understand and practice just small fractions of it. Im glad we got some marginal rate breaks last year, good for us, but its still an abject disaster.

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You're right and that's still not the IRS' fault. That's our fault. You get the government you deserve. We keep voting for clowns that keep passing legislation nobody understands until it's too late. Why blame the guy doing his best to interpret the newly added mess and how it relates to the already existing mess? I guess I just look at government in two tiers. First is the working stiffs that aren't substantially different than us. Then there's the ruling elite that are nothing like us. I blame the latter, they are the ones we have empowered to vote on our behalf. That they abdicate their duties at every turn isn't the fault of the working stiff trying to pick up the pieces but rather our fault for letting them get away with it.

I have a view point

if the Gov't has the ability to put you in jail based on how you file your taxes

then it should be their obligation and education to tell you exactly how much you owe and not the other way around

we can go to jail based on something that most of us have no education, no experience, and no gov't training on yet we are 100% determined to get the amount right based on rules that are not black and white and we have the obligation to pay someone (who can still get it wrong) to tell us what we need to pay (why?) that the gov't proposes and can put you in jail.

Make it easier or stfu and get out of the way. It needs to be easy even for business owners