IRS Releases Audit Guide on Hobby Losses

When you engage in an activity without having a profit motive, deductible losses from the activity each year cannot be greater than income from the activity. The IRS has now released an audit technique guide for its agents to use in determining whether an activity is engaged in for profit.

The reason for the guide is concern that many taxpayers are improperly claiming business losses. One report shows that about 1.5 million taxpayers, many with significant income from other sources, filed Schedules Cs showing no profits, only losses, over four consecutive years (2002–2005) and that this enabled about 1.2 million of the 1.5 million to avoid paying $2.8 billion in taxes. The guide will help agents identify taxpayers who erroneously claim business deductions that should have been limited by the hobby loss rule.