Submission Instructions

You are reviewing a completed tax return with a client and she asks about the additional taxes calculated on Schedule SE and reported on her $1040.$ You explain that these are taxes associated with the holiday candy making sales that is reported on Schedule C$.$ She explains that it was just a few thousand dollars in net income and she really does it just as a hobby, so she asks you to not file the Schedule C or SE and to not report the income and expenses on her $1040.$ She further explains she received all the sales in cash and nobody will know the difference and asks why she can't use the hobby loss rules she has heard about to avoid paying taxes on this small amount of income.

Review your eText and the IRS Audit Guide on Activities Not Engaged in for Profit

Based on your review, formulate a memorandum to your client that explains your position.

Include specific information on the tax code and the Hobby Loss Rule provisions that support your position.