Farmers ATG

Publication Date - May, 2011

NOTE: This guide is current through the publication date. Since changes may have occurred after the publication date that would affect the accuracy of this document, no guarantees are made concerning the technical accuracy after the publication date.

This Audit Techniques Guide (ATG) is presented in several chapters. These chapters can be accessed and then printed by following the links in the Table of Contents below.

Table of Contents

Chapter One: Audit Flow (PDF - 248KB)

• Purpose of Guide
• The Information Document Request
• The Pre-Audit
  • The Structural Analysis
  • Choice of Entity
  • The Crop Map
  • Using Industry Averages
• The Initial Interview
  • Interview Questions
  • Tour of Business
• The Audit
  • Crop Accounting Records
  • Crop Loans
  • Crop Contracts
  • Grower Statements

Chapter Two: Income (PDF - 338KB)

• Income Issues
  • Introduction
  • Methods of Accounting for Farming – Cash/Accrual/Hybrid
  • Income Deferral and Constructive Receipt
  • Agricultural Program Payments
  • Loans
  • Unreported Sales and By-Product Sales
  • Related Entities
• Examining Farmer Income Records
  • Introduction
  • Audit Issues and Techniques
  • Loan Issues
• Gross versus Net Proceeds
• Rules of Thumb and Other Information on Farming
  • Livestock and Farming - Basic Knowledge
  • Row Crops
• Other Farm Related Issues
• Appendix - A
  • Accounting Methods Lead Sheet

Chapter Three: Basis on Farm Assets (PDF - 200KB)

• Introduction
• Like Kind Exchanges
• Gifted Property
• Inherited Property
• Farm Sale
• Cost Recovery - Depreciation and Depletion
  • Alternative Minimum Tax (AMT) Adjustment
  • IRC § 179 Deduction
  • IRC § 179 Recapture
  • Special Depreciation Allowance
  • 1245 Property
  • Mineral Rights
  • Water Rights
  • Cost Depletion
  • Percentage Depletion
  • Commodity Bases
  • Basis on Farm Assets - Potential Issues

Chapter Four: Expenses (PDF - 129KB)

• Introduction: Farm Business Expenses
  • Deposits or Payments
  • Prepaid Expenses
• Related Entities
  • Introduction
  • Law
• Capital vs. Reoccurring Costs
  • Land Preparation
  • Uniform Capitalization
• Contract Labor
  • Labor Expenses
• Outside Services Informational Sources

Chapter Five: Cotton (PDF - 181KB)

• Cotton Production Cycle
• Cotton Terminology
• Cotton Farming Information
  • Yields and Prices
  • Planting and Growing
  • Ginning
  • Storage
  • Sales
  • Government Programs
  • CCC Loans

Chapter Six: Raisin Grapes (PDF - 306KB)

• Overview of Industry
  • Sources of Information
  • Grape Use, Raisin Production, and Raisin Varieties
  • The Industry Stakeholders
  • Raisin Grower/Packer Contract for Raisin Delivery
  • Concept of “Free Tonnage”
  • Concept of “Price Per Ton”
  • Interplay of Grower Receipt Requirements… “Real World” Considerations
• Growing Production Cycle for a Mature Vineyard
• Development of a New Vineyard
• Mature Productive Operating Vineyard
• Method of Accounting
• Rancher or Farmer
• Gross Income
  • Raisin Receipts
  • Patronage Dividends
  • RAC Payments
• Expenses and Depreciation
• Related Party Transactions
  • Entities
  • References
• Exhibit A: Cites from Code, Regulations, Revenue Rulings and Court Cases

Chapter Seven: General Livestock (PDF - 495KB)

• Introduction
  • Keeping in Touch with the Industry
  • Compliance Potential
  • General Livestock Risks
• Industry Issues
  • Breeder Operation
  • Fattening/Feeding Operation
  • Issues
• Cattle Industry
  • Introduction
  • Issues
• Dairy Cattle Industry
  • Introduction
  • Industry Facts
  • Issues
• Horse Industry
  • Introduction
  • Issues
• Sheep and Goat Industry
  • Sheep
  • Goats
  • Issues
• Swine Industry
  • Facts and Figures
• Ratites and Alternative Livestock
  • Ratites (Ostrich, EMU, RHEA)
  • Alternative Livestock
• Appendix - A
  • Interview Questions - by Type
• Appendix - B
  • United States Department of Agriculture
• Appendix - C
  • Market Segment Understanding Guidelines for Agricultural Labor — Noncash Remuneration
• Appendix - D
  • Suggested Web Pages For Further Research:

Chapter Eight: Livestock Marketing / Auction Barns (PDF - 429KB)

• Introduction
• Auction Barn Operations
• Legal Aspects
• Third Party Sources of Information
• Initial Interview
  • Livestock Market
  • Producers
• Examination Techniques
• Information Document Request
• Penalties
• Conclusion
• Exhibits
  • Exhibit 1 – Initial Interview Questions – Producers
  • Exhibit 2 - Glossary
  • Exhibit 3 – Example of Cattle & Weight Tally and Settlement Sheet
  • Exhibit 4 – Example of Cattle Purchase Contract
  • Exhibit 5 - Suggested web pages for further research

Chapter Nine: Grain (PDF - 784KB)

• Introduction
  • Risk
  • Crop/Grain Production Cycles
• Basic Examination Techniques
  • Basic Farm Records
  • Books and Records Needed
  • Document Request
  • Interview
  • Online Resources and Information
• Employment Taxes
  • Internal Revenue Manual (IRM) 4.10.5
  • Form 943, Employers Annual Tax Return for Agricultural Employees
  • Law Changes and Potential Examination Issues
  • Treatment of Non-Cash Wages
  • Self-Employment Tax Attributable To Compensation in Commodities
  • Filing Return and Depositing Tax
  • Form 940, Employers Annual Federal Unemployment Tax Return
  • Form 1099, Information Returns
  • Compensation to Spouse or Family Members
• Farm Inventory
  • Basic Requirements
  • Accounting for Inventory
  • Inventory Valuation Methods
• Income
  • Background
  • Sale of Crops and Produced Items
  • Constructive Receipt of Income versus Installment Sale Reporting Of Income
  • Crop Shares
  • Use of Contracts to Defer Income Recognition
  • Distributions from Cooperatives
  • Easements and Rights-Of-Way
  • Other Farm Income
  • Machine Work
• Hedging Farm Commodities
  • Hedging Transactions - Defined
  • Marketing Tools Used To Protect the Price of a Commodity Hedging Cattle
  • Hedging Grain Crops
  • Transaction Analysis
  • Accounting Methods for Hedging Transactions
  • Examination Techniques
• Cancellation of Indebtedness
  • Background
  • General Rule
  • Exclusions From Income (IRC section 108(a)(1))
  • Examination Techniques
• Foreclosures, Repossessions, and Abandonment
  • Debt Discharged By Transfer of Property
  • Discharge of Debt Secured by Property
  • Character of Gain or Loss
  • Abandonment of Property
  • Examination Techniques
  • Farm Business Expenses
  • General Farm Expenses
  • Examination Techniques
  • Basis and Sales of the Farm and Farm Assets
  • Background
  • Basis of Farm Assets
  • Selling the Farm
• Depreciation
  • MACRS Depreciation
  • Alternative Minimum Tax (AMT) Adjustment
  • Section 179 Election
  • Special Depreciation Allowance (SDA)
  • Listed Property
  • Examination Techniques and Procedures
  • Publication 225, Table 7-1. Farm Property Recovery Periods
  • Mineral and Water Rights
  • Depletion
  • Sales of Livestock
  • Sale of Items Bought For Resale
  • Sale of Livestock Held For Draft, Breeding or Dairy Purposes
  • Distress Sales of Livestock Due To Weather-Related Conditions (Drought, Flood, Etc.)
  • Examination Techniques
• Credits
  • Fuel (Excise) Tax Credit
  • IRC Section 6675 Penalty
  • Including the Credit or Refund in Income
  • Examination Techniques
  • Diesel Fuel
  • Gasoline
  • Table – Basic Rules for Claiming a Credit
  • Table - Credit or Refund for a Nontaxable Use of Fuel
  • General Business Credit (Form 3800)

Chapter Ten: Tobacco (PDF - 209KB)

• Tobacco Industry Background
• Tobacco Farms and Production
  • About the Plant
  • Production Cycle and Yield
• Tobacco Revenue and Expenses
  • Tobacco Contracts
  • Income Probe
  • Tobacco Farming Expenditures
• Tobacco Transition Payment Program
  • Tax Issues
  • Lump-Sum Payment
  • Like-Kind Exchange