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:: Farmers Audit Techniques Guide - Chapter One - The Audit
Chapter
One - The Audit Flow
The
Audit
Crop
Accounting Records
Always request
crop accounting records in your
IDR. If they are not provided,
ask the farmer during the
interview. A farmer may have
these records, but may be
unfamiliar with the accounting
term/name used. The information
contained in the crop accounting
records can be used to adjust
the scope of your exam to focus
on areas with the most
likelihood of adjustment.
At the
beginning of the season, the
farmers frequently need to
prepare a budget for that year’s
crop. Budgets are needed for a
variety of reasons, including
obtaining crop financing for the
coming year. The budget usually
includes estimated income and
expenses for each crop
produced. In most crop
accounting systems, the budgets
are compared to the actual
year-end and any variances are
noted. Many computer systems
also include the actual amounts
from the prior year. When a
farmer grows a wide variety of
crops, these records can be
invaluable. The examiner can
focus the audit on the accounts
with substantial variances
rather than the accounts that
are within the budgeted amounts.
Crop
Loans
Crop loan
records can be used in a variety
of ways during an exam. Crop
loan records should include:
-
Loan
Agreement; including a
statement regarding
collateral.
-
Loan
History/Activity;
including the month
subsequent to the Fiscal
Year End.
-
Crop
Budget or Financial
Statements used to
obtain the loan.
Crop loan
records first need to be
examined for any related party
issues. Financing can be
obtained directly from related
parties or from third parties
(such as banks) using “shared”
loans for various related
farms. Look at the loan
agreement and see that the
borrower is the farmer under
exam and that the lender is
truly an unrelated third party.
Unrelated Third Party Financing
Look at the loan
activity detail. Since most
farmers are cash basis always:
TRACE THE MONEY.
-
Trace
all reductions in the
loans to actual payments
by the farmer. Many crop
loan agreements include
payments to be made
directly to the loan
from the crop
purchaser. These
payments are never
deposited to the
farmer’s bank accounts
and can be sources of
unreported income if the
farmer does not have
double entry books.
-
The
timing of the loan
repayments may also be
an indication of a
potential issue.
Repaying a loan in the
month subsequent to the
end of the fiscal year
is an indication of a
possible deferred
payment contract (See
Chapter 2, Income).
Related
Party Financing
If the loans are
obtained from related parties or
the proceeds are shared by
related parties, TRACING THE
MONEY is even more important.
-
ALWAYS
review both sides of
these transactions. Use
T Accounts or journal
entries to visualize the
tax consequences to both
parties.
-
If a
related entity is acting
as a broker for the
farmer, determine when
payment was
constructively received
for the crops. The loan
proceeds could be income
to the farmer. This may
sometimes involve
reviewing the books of a
related party, but the
information may also be
available from the
farmer under exam. If
the books of a related
party need to be
reviewed, that return
can be opened for exam.
-
ALWAYS
remember to review IRC §
267 to determine who is
related. IRC § 482 is
available to more
clearly reflect income
between related
parties. The Substance
vs Form rules should be
reviewed when there is a
question regarding
whether a transaction
between related parties
is arms length.
Crop
Contracts
Crop contracts
should be reviewed for all crops
produced by the farmer. Usually
an entire crop is sold to one
purchaser, but sometimes crops
are sold to a variety of
purchasers. Review crop
contracts for quantity sold,
payment terms and delivery
terms.
Quantity Sold
The crop contracts will have
some detail regarding quantity
sold. Compare to industry
averages to determine if the
quantity is reasonable. The
quantity detail on the contracts
will vary by type of crop. It
can include number of acres,
bales, boxes or pounds of crop.
-
If
stated in acres, compare
the acres on the
contracts with the acres
from the map.
-
If
stated in quantity,
compare the quantity on
the contracts with the
quantity obtained using
industry averages.
Payment
Terms
If the payment is not being
deferred, your next step is to
compare the grower statements
with the taxpayer’s books.
If payment is
being deferred until after the
close of the farmer’s fiscal
year end, is this a valid
deferred payment contract? (See
Chapter 2, Income)
If the deferred
payment contract is in question,
ALWAYS get a photocopy for your
workpapers. There are many
factors to consider in
determining if this is a valid
deferred payment contract.
Do the payment
terms include crop advances or
payments on behalf of the
farmer? If so, are these
properly included into income
when the money or the benefit is
received?
Delivery Terms
One major factor in determining
if a deferred payment contract
is valid, is the date the
contract was entered into versus
the delivery date. A copy of the
contract along with copies of
delivery tags or delivery dates
on the grower statements can be
very important to answer some of
these questions. ( Chapter 2,
Income Deferral)
Grower Statements
All purchasers
of crops provide some form of
grower statements. These can be
provided monthly or at the end
of the crop year. The grower
statements will include:
Quantity Delivered
-
Compare
the quantity delivered
to the quantity
described in the
contract.
-
Compare
the contract number with
the grower number on the
statement. Some farmers
have multiple accounts
with one purchaser.
-
Question any large
variances in quantity
delivered.
Quantity Accepted
If only part of the delivered
crop was accepted or if there is
a large unexplained variance
between the quantity contracted
and delivered, question the
farmer. If a large amount of
crop was rejected or not
delivered, this should have been
brought to your attention during
the initial interview.
-
What
happened to any rejected
crop?
-
Was it
reconditioned and resold
to another purchaser?
-
Was it
sold in another type of
market for a lesser
price? This would
include sales such as
winery use, juices,
cattle feed, etc.
-
Was it
disposed of? If so, how
did the farmer dispose
of it?
-
Was it
insured? Certain crops
like cherries can not be
insured.
Gross
Payments, Deductions and Net
Amount Due
-
Review
all statements for your
crop year covering all
payments until the
balance owing to the
grower is zero.
-
Review
how your farmer reports
his income. Some farmers
report net payments into
income while others
report gross payments
and claim as expenses
the deductions to gross
payments.
-
Review
for the following:
-
Were there advances
- did the farmer
report them as
income when
received?
-
Were there payments
made to third
parties? These can
be payments on
loans, payments for
farm expenses,
capital asset
purchases, or for
any number of
reasons, either
business or
personal.
-
Compare
the grower statements to
the contracts to see
that the payment terms
agreed to in the
contract are actually
being followed.
THE
GROWER STATEMENT IS ONE OF THE
MOST IMPORTANT DOCUMENTS IN THE
EXAMINATION OF A FARMER’S
INCOME. If the farmer
cannot provide the grower
statements, copies can be
obtained by following Third
Party Contact procedures and
requesting them from the packing
house or broker.
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