IRS Should Perform More Examinations of Returns That Report Losses From Rental Real Estate

IRS should perform more examinations of individual tax returns that report losses from rental real estate activity, the Treasury Inspector General for Tax Administration (TIGTA) said in an audit that was made public on March 9. (Audit Report No. 2011-30-005) The impetus for the audit was a 2008 TIGTA report that found at least 53% of individual taxpayers with rental real estate activity for tax year 2001 misreported their rental real estate activity. According to TIGTA, that misreporting resulted in an estimated $12.4 billion of net misreported income. One of the objectives of the new audit was to recommend ways to assist in the identification, selection, and examination of tax returns with rental real estate activity. During fiscal years 2008 and 2009, IRS's rental real estate Compliance Initiative Program (CIP) examined a small percentage of the 318,339 examinations conducted by revenue agents and tax compliance officers, TIGTA said. Auditors projected that if the agency increased the percentage of rental real estate CIP tax returns it examined, potential tax assessments could grow 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 J. Russell George, the inspector general. The audit is located at http://www.treasury.gov/tigta/auditreports/2011reports/201130005fr.pdf.