Publication Date - July 2006

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.

Table of Contents / Chapter 2
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Chapter One - The Audit Flow

• Purpose of Guide
• The Information Document Request
• The Pre-Audit
• The Initial Interview
• The Audit

The Initial Interview

Interview Questions

The initial interview of the farmer, as in all audits, is very important. Being knowledgeable in farm terminology will help you get the most from the interview, since it puts the taxpayer more at ease to freely discuss business operations, problems, yields, purchases, improvements built, hobbies, children, new plantings, etc. Always look for ways to customize the interview questions based on knowledge of the taxpayer and specific products. Initial interview questions for general farms, beef, dairy, swine, sheep, farm vehicles and exotic animals are available in ATGs’ and from the SB/SE Agriculture Technical Analyst at The IDR and initial interview questionnaire can be used together to ensure pertinent questions and documents are received. Add, modify or delete questions to customize the initial interview to the farmer.

Initial interviews of farmers can be hard to arrange. To accommodate the farmer, try  combining the business tour with the initial interview. During your tour, use correct terminology, ask open-ended questions, don’t be afraid to ask for explanations, and don't pretend to understand something if you really don't. Use it as an opportunity for the farmer to teach you about the industry. Substance vs. Form and Active vs. Material participation cases are many times won or lost based on information gathered by the auditor during the initial interview. Address these issues immediately if they arise.

Tour of Business

Insist that the person giving the tour be knowledgeable and consider the following:

1. Do you see young vines/trees? - When were they planted? When is the first harvest?  Check the depreciation schedule for the capitalization of the vines/trees and  for the overhead capitalized costs per IRC § 263A, UNICAP (See Chapter 4, Expenses).
2. Do you see improvements? - Look for things such as stakes, trellises, fences, irrigation systems, buildings, etc.
3. Are there houses on the property? - Many taxpayers have bought additional farms as people retire and leave. This can create rental income or employee housing issues.
4. Are there calves at a dairy? - Dairies have a high incidence of unreported calf sales.  Ask and verify  what is done with the bull calves. If the calves are being sold for cash, they may be seen tethered by the corrals waiting to be taken to the auction yard or to be picked-up by a buyer.
5. What kind of machinery is there? - The farm machinery should match the crop produced. If it doesn’t, then there could be income from renting out the specialized equipment. For example, if a grape farmer has a cotton picker or an almond shaker, this should be questioned.
6. Do you see large trucks? - Some farmers have large trucks to haul their crops to the packing houses. During the non-harvest season they may haul hay or other commodities for additional income.