Will IRS Increase Its Audits of Tax Returns Reporting Losses From Rental Real Estate Activities?


By Ron Kramer

Recently, an audit report released by the Treasury Inspector General for Tax Administration (TIGTA) suggested the Internal Revenue Service (IRS) should increase its examinations of individual tax returns that report losses from rental real estate activity. TIGTA’s report was conducted because a Government Accountability Office report, in August 2008, stated that at least 53 percent 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. IRS data for taxable year 2001 shows that 8.7 million (6.7 percent) of the 130 million individual income tax returns filed for that year had rental real estate activities. Specifically, taxpayers reported net rental real estate income of approximately $47 billion on 4.2 million tax returns, and $31 billion in net rental real estate losses on 4.5 million tax returns.

TIGTA projected that if the IRS increased the percentage of rental real estate tax returns it examines, they could increase potential tax assessments by $27.3 million over a five-year period.

“Given the magnitude of underreporting in our voluntary system of tax compliance, even small improvements in the IRS’s examination of tax returns with rental real estate activity could increase taxpayer compliance and generate substantial additional revenue to the Federal Government, helping reduce the Tax Gap,” said Treasury Inspector General for Tax Administration J. Russell George.

The IRS agreed with TIGTA’s recommendations, so we might see more audits of individual tax returns claiming real estate losses in our future.

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This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax-related matter.

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