IRS to Examine Rental Losses More Closely

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.

Accounting Today reports:

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.

Read more here

Latest Good Reads

New Bill Requires Landlords to Report Contractor Information

Does Cutting Tax Expenditures = Reducing Spending?

What About the Gift Tax?

Tax Cuts and Deficit Commissions

GAO: Compliance Costs of ObamaCare's 1099 Reporting Requirement Are Low

Tax Deduction of the Week: Rental Properties

Yesterday, the Roni Deutch Tax Center – Tax Help Blog posted a new entry in their deduction of the week series. This new article discusses rental properties and the tax deductions available to landlords. You can find the text of the blog entry below, or visit the Roni Deutch Tax Center – Tax Help Blog and subscribe to the RSS feed to stay updated on all future deduction of the week entries.

Interest

As a landlord you will pay a decent amount of money in interest. Fortunately, many of these expenses can be deducted on your tax return including mortgage interest, loans to improve the property, and credit card interest on goods or services used in your property management.

Travel Expenses

If you have to travel to maintain your rental, collect rent, or show off the property, then you can deduct these expenses. You have the option to either deduct the actual expenses – which can be especially useful if you must travel by plane and stay in a hotel – or take the IRS’ standard mileage rate for any miles driven.

Home Office

If you have a home office that you use to run your property management business then you may be eligible to claim the home office deduction. However, in order to qualify as a home office in the eyes of the IRS the room must meet certain specifications. To learn more about the home office deduction check out this deduction of the week entry from earlier this year.

Employees, Independent Contractors, and Professionals

Any wages paid to an employee or independent contractor (such as a property manager or on call repair person) can be deducted as a business expense. Additionally, fees paid to a professional (such as an attorney, accountant, real estate investment advisor) can also be deducted as operating expenses.

Questions for the Tax Lady: April 26th, 2010

Check out the following new Questions for the Tax Lady answers and feel free to ask me questions through one of the links below. You can send me an email, direct message or @ reply, and I will do my best to get an answer for you!

Question #1: If I make energy efficient upgrades to a rental property will they still qualify for the federal tax credit?

Unfortunately, the IRS will only allow you to claim the federal tax credit for energy efficient improvements made to your primary residence. Therefore, rental properties or summer homes will generally not qualify.

Question #2: I just realized I made a mistake on my federal tax return, how do I correct it?

You may need to file an amended return with the IRS depending on the error. If it is just a simple math error then the IRS will most likely correct it, but if you forgot to include all sources of income or missed a valuable credit then you will need for file IRS Form 1040X, Amended U.S. Individual Income Tax Return.

Questions for the Tax Lady: February 15th, 2010

Check out the following new Questions for the Tax Lady answers and feel free to ask me questions through one of the links below. You can send me an email, direct message or @ reply, and I will do my best to get an answer for you!

Question #1: In addition to donating to organizations providing relief in Haiti, is there anything else I can do now to lower my 2009 tax liability?

Yes, you can make retroactive payments to a traditional IRA anytime before the April 15^th deadline. Therefore, any contributions can help reduce your 2009 tax liability. For more information, check out this blog entry explaining traditional IRA deductions.

Question #2: Do I need to report income from a rental property on my tax return?

Yes. You will need to report your rental property income on Schedule E of IRS Form 1040. You will need to include all rent payments as part of your gross income—this is line 17 on IRS Form 1040. However, you must also report the following rental property related items as income:

• Advanced rent
• Security deposits
• Lease canceling payments
• Property or services received
• Other expenses paid by tenants