There are more than 30 million acres in the Conservation Reserve Program and the tens of thousands of CRP landowners are going to be gnashing their teeth while the Internal Revenue Service collects more taxes on the rental payments from USDA. Buckle your seatbelt, get a grip, and …..

How much money did you receive in CRP rental payments during 2007? If you received compensation from the USDA for your land in the Conservation Reserve, Extension tax specialist Gary Hoff at the University of Illinois says prepare to pay self employment tax on those payments. His Agricultural Law and Tax Briefs newsletter says this is a reversal of IRS policy and will impact all CRP landowners.

Hoff says cash rent income has been immune from the self-employment tax, and for years, the rent received from USDA for CRP acreage was considered immune as well. Unless the landowner was materially participating in the farming operation, there was no reason to pay the self-employment tax. But the IRS believes ownership of CRP land is the same as ownership of a business, since it requires seeding and maintenance of a cover crop and weed control. Hoff says it make no difference if the landowner is an elderly person in a nursing home and does not even understand the concept of the CRP. Self employment tax is still due.

The latest action extends back to 2003, when the IRS ruled that all USDA land diversion and conservation program payments are subject to the self-employment tax, regardless of whether the owner is farming or non farming non-CRP land. That was a change of policy, but the IRS modeled it after tax rulings on acreage idled during the 1983 Payment In Kind program. But in 1988, the IRS had ruled that a retired farmer did not have to pay self employment tax on his income from CRP land. Subsequent court ruling have held that an active farmer did owe self employment tax on CRP land, but someone not farming did not owe the tax.

With the change, Hoff says the IRS draws a line in the sand for taxpayers and tax preparers, warning them that interest and penalties may accrue, if the self employment tax is not paid on CRP rental receipts. That is the law, until either the IRS reverses its position, or Congress exempts CRP rent from the self employment tax if the landowner is not actively farming. That legislation has not yet passed.

Your tax preparer may not want to take any chances, since the IRS has indicated that any preparer not following the rule will be subject to a penalty. The penalty is no less than $250, and could be as high as $1,000 or 50% of the fee for preparing the tax return, whichever is greater. The tax preparer does have the opportunity of submitting a statement indicating he or she is taking an alternative viewpoint.

Summary:
The Internal Revenue Service has reversed its policy which affects owners of land in the Conservation Reserve Program. For those landowners who are not actively farming, the IRS has ruled they must pay self-employment tax on the rental proceeds from USDA. The change is effective for the 2007 tax year, and tax preparers can be financially penalized for not adhering to the new policy.