Earlier this week a government report was released claiming that over half of taxpayers with rental real estate activity in 2001 misreported their rental income. Shortly after the Government Accountability Office report came, the IRS agreed with their request to increase examinations of rental loss activity.
The objectives of TIGTA’s review were to evaluate the IRS’s scrutiny of individual tax returns with rental real estate activity and to recommend changes to help identify, select and examine tax returns with rental real estate activity.
TIGTA found that during fiscal years 2008 and 2009, the IRS’s rental real estate Compliance Initiative Program examined only a small percentage of the 318,339 examinations conducted by revenue agents and tax compliance officers. TIGTA projected that if the IRS were to increase the percentage of rental real estate CIP tax returns it examined, it 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 TIGTA Inspector General J. Russell George in a statement.
IRS management agreed with all of TIGTA’s recommendations, disagreeing only with the report’s proposed monetary outcome measures.
In its report, TIGTA recommended that IRS officials conduct an analysis to determine the population of tax returns with rental real estate activity that meets the criteria for inclusion in the CIPs. The IRS should also revise the instructions for Form 8582 to require all taxpayers with prior-year unallowed passive activity losses to submit the form with their tax return. The report also recommended that the IRS ensure that the information taxpayers provide to report the net amount of income earned or losses incurred from being a real estate professional is transcribed.