Real Estate Losses Become IRS Tax Audit Target

Taxpayer Slipups Misreported Real Estate Numbers.The IRS is stepping up property scrutiny as a result of a 2008 Government Accountability Office finding: “At least 53% of individual taxpayers with rental real estate activity for Tax Year 2001 misreported their rental real estate activity, resulting in an estimated $12.4 billion of net misreported income.”

That spurred the Treasury Inspector General for Tax Administration, an independent overseer, to evaluate how the IRS covers individual tax returns with rental real estate activity and to propose changes. These changes amount to a call to war on real estate tax cheats. The IRS is also going to require substantial additional accounting records and costs for all real estate investors.

Gaining From Losses

The Dec. 20 TIGTA report specifically recommended that the IRS boost the number of audits of tax returns showing real estate losses. Based on a study of fiscal 2008-09 data, it projected that increased tax examinations could add up to $27.3 million in tax assessments over five years.

“Taxpayers are likely to see rental-property-related audits rise starting almost immediately on all open tax years,” said Audubon, N.J., CPA Joel Petchon. “As of April 15, 2011, returns filed for 2007 in April 2008 will be insulated by the three-year statute of limitations. All others will be subject to potential audit.”

Real estate investors are normally in higher marginal tax brackets, so such examinations should be more productive than exams of other taxpayers.


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