Taxpayers Beware: the IRS Continues to Focus on New Areas of Enforcement With Rental Losses Next Target

March 16, 2011

The IRS announced the Agency will increase its examinations of individual tax returns that report losses from rental real estate activity. This is part of the continuing effort of the IRS to collect under-reported taxes to the federal government, helping reduce the tax gap.

This effort is in response to a 2008 Government Accountability Office report that said that more than half of taxpayers with rental real estate during the 2001 tax year misreported that activity, leading to $12.4 billion being wrongly reported. It is estimated by the IRS that about 7% of 2001 individual tax forms contained rental real estate activity. Through looking at a small percentage of the 318,339 examinations conducted by revenue agents and tax compliance officers projected a potential tax assessments of $27.3 million could be generated over a five-year period with increased examination and enforcement.

While there is disagreement about how much could actually be generated from such an effort, the IRS is moving forward on a number of fronts. The IRS, in connection with the development of compliance strategies, plans to consider whether additional Compliance Initiative Projects (CIP) are appropriate. In addition, the IRS plans to revise the 2011 instructions for Form 8582 and transcribe the information taxpayers provide to report the net amount of income earned, or losses incurred, from being a real estate professional. The new examination procedure is to help identify, and to select the most high-risk returns for audit.

Please check with your Perelson Weiner Partner for more information.

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