Is the preparer responsible in determining if something is a business or hobby?

[ret]

Is the preparer responsible in determining if something is a business or a hobby or can they go by the clients records?

[IRonMaN]

You are signing the return.  If you really feel that the client has a hobby instead of a business are you going to feel comfortable signing the return?

[BobKamman]

More specifically, you are signing the return under penalty of perjury, "based on all information of which preparer has any knowledge."  I don't know what you would find in the client's records that would help make this determination.   Maybe if his ledger sheets had a heading of "MY HOBBY" on each page.  An IRS auditor is not going to decide whether it is a hobby or business, just by looking at the records.  An auditor is going to ask the taxpayer to explain where there is a profit motive and expectation.  You should do the same.  

[dascpa · Accepted solution]

See this Journal of Accountancy article on the 9 factors used to determine business versus hobby.  https://www.journalofaccountancy.com/issues/2013/oct/20138370.html

The reality is, some of these factors are not easily answered as they are "esoteric" in nature.  So the tax preparer has to take a position and present it to the client.  If I honestly believe it's a hobby and the taxpayer says otherwise, I will unfortunately have to terminate the client.  They will then easily find someone else who will take their position and argue we're idiots.

But if I feel the client has a "good leg to stand on" under audit, I will side with the client, but I will document my concerns about this (or any other issue) and give a copy to the client.  It's not like this situation is a 1 + 1 = 3.  Yes it does or no it doesn't

[Taxprohere]

(Emphasizing what dascpa said) this should call for a CYA disclosure if you decide to prepare the activity as a business.  Disclosure being that your decision to prepare it this way is based on evidence and argument the client provided to you.  If audited and the IRS overturned the business treatment, your P&I coverage (I'm assuming that's a component of your service) is not applicable in these situations.  Disclosure ie informing the client in writing of course!

[Accountant-Man]

I call this the Richard Nixon rule: What did you know and when did you know it?

You cannot prepare a tax return if you have knowledge that an item is being treated improperly and there is a "more than 50%" chance that it will be disallowed. That's 50.000001% chance.