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The Treasury Department's watchdog group thinks it smells a rat when it comes to reports of Schedule C losses on tax returns, and it's urging changes in the Tax Code to establish 'bright-line' rules for determining when an activity is a legitimate business. The Treasury Inspector General for Tax Administration issued a report this month estimating that about 1.5 million taxpayers filed a Schedule C showing no profits and only losses over four consecutive tax years for their businesses. Tax practitioners helped 73 percent of these taxpayers to prepare the returns.
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TIGTA estimated that by claiming the losses to reduce their taxable income, about 1.2 million taxpayers potentially avoided paying a total of $2.8 billion in taxes for 2005. The analysis showed that 332,615 high-income taxpayers received the biggest benefit by potentially avoiding about $1.9 billion in taxes for 2005. Section 183 of the Tax Code already contains a 'hobby loss' provision that is supposed to limit the ability of wealthy people who have multiple sources of income to apply the losses they incur in their sidelines as a way to reduce their overall tax liabilities.
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