IRS is Auditing My Real Estate Business

[Raquel Baranow]

My business is buying vacant land, cheap through tax lien foreclosure and then selling it. I own 125-vacant lots. Business is BAD, I haven't made a profit in years. I was holding some of the lots for investment but then economy went bad and taxes eat too much profit.

My biggest expense is paying the property taxes on the vacant lots. I deduct the taxes (average $25k/year) on Schedule C. IRS is "disallowing" ALL my Schedule C expenses, including use of car, home office, postage, HOA dues on vacant lots . . . I have receipts for everything.

On Form 886-A they said since my business did not make a profit in three out of five years per IRC 183(d) it is "presumed" that "an activity is not a business." They say I owe $6656.52 for 2010 and they just sent me another audit letter for 2011 . . . I'm thinking I should amend my 1040 but I don't know what strategy to take.

I made about $35k in interest from installment sales in 2010 and $18k in principle payments on the sales.

I never file Schedule A.

What should I do???