IRS Audits for Real Estate Professionals, II

IRS logo

Why has the IRS targeted real estate professionals at this time?  According to their own December 20, 2010 report:

Actions Are Needed in the Identification, Selection, and Examination of Individual Tax Returns With Rental Real Estate Activity.

In August 2008, the Government Accountability Office 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.”

Internal Revenue Service (IRS) data show that during Tax Year 2001, 8.7 million (6.7 percent) of the 130 million filed individual income tax returns 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.

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IRS Audits for Real Estate Professionals

A friend of ours owns rental properties and is in the midst of being audited.  She shared some interesting items I’d like to pass along:

“Nevadans (she lives in Nevada) are audited 150% more than people living in Wyoming.

In the 2010 JK Lasser Real Estate Investors Tax manual it states, more or less, (copyright laws):

If you show a lot of income besides the real estate income,  the IRS thinks you have a full time job and so they think you cannot spend more than half your time in your real estate business so they may select you for an audit.”

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Tax Statements and Private Money Lenders

1099 tax form information

 

It’s tax time… Have you borrowed hard money? Have you lent private money? When lending and borrowing, are you mailing and/or receiving 1098′s or 1099′s? Do you know how to use them?

At our last Mastermind Meeting, there were questions concerning who gets 1099 income and 1098 statements.  We asked our CPA and here is what was shared:

You should provide 1099 INTs to whomever interest is paid.  Whether a 1099 is sent or received, the person or entity who receives the interest is responsible for reporting the interest income. You have proof that you are paying the interest even if the recipient does not send you confirmation of the payment. If the recipient does not report it, then the recipient would face fines and penalties for unreported income. There is a $50 penalty for forms not filed.

The 1098 is filed by the interest recipient of mortgage interest. You should send 1098s to any owner financed properties on which you received interest. If private money is linked as a mortgage on a specific property, then the interest recipient should send to you a 1098.  There are penalties if the IRS pursues and discovers that 1098s were not filed.

As always, check with your CPA for all tax questions and discuss with your closing attorney so these issues can be handled correctly from the beginning of all transactions.

What does your CPA say?

**UPDATE**   “You should be aware that there are penalties for failure to send a required 1099 (Misc, Div, Int, etc.).  The good news is that the penalty is based on how late you’re filing.  If it’s just 30 days late, the penalty is only $15 per information return.  It increases to $30 if you file by August 1, and goes to $50 if you file after that.  So, if you’re late, procrastination will only make it worse.

You may be able to avoid the penalties completely if you can show that failure to comply was due to reasonable cause.  But that’s not as easy to do as it sounds.  Failure to file a W-2 results in a $50 penalty per W-2.  Failure to file the W-3 summary of the W-2s starts out at $15.”

Depreciation Advantage for Hold Properties

Tax forms

Tony Robinson, one of the coaches for our local Mastermind coaching groups, wrote the following article on the value of depreciating your properties.  Depreciation gives you HUGE tax advantages which is a large income stream that not everyone considers when they’re contemplating becoming a landlord.

I hope the following explains some of the advantages you may not have considered.  If you have any questions about depreciating properties, please add them here to the comments section so we can clear up any confusions.

Here’s a synopsis of Tony’s article:

Many of us using the long term hold strategy fail to capitalize on one of the true benefits of owning real estate. Though the benefits are many, I find the ability to offset income by maximizing depreciation to be the most valuable of all. Did you know that depreciation allowances offset the gross income received on real estate?

Let me explain. The IRS extends the benefit of depreciation to owners of rental property.  Here, the government is actually giving us an incentive to own real estate! The depreciation factor for single family residential property is 27.5 years. This means that you can take depreciation on the “dwelling” spread out over 27.5 years.

An example of how depreciation works is as follows:

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The IRS is Liening Hard


When times are good and cash is flowing, Congress tends to pick on the IRS.  Times, like now, when the government is out of money, Congress prefers to ignore any IRS pursuit of the public.

Look out, here comes the IRS.

To give you an idea of their added zeal, in 1999, the IRS issued 168,000 liens.  Last year, in 2009, they issued 966,000.  Your odds of hearing from the Internal Revenue Service have improved.

Here in Greensboro, Uncle Sam just put 20 more agents in the field.  Timothy Geitner said the government is going to spend $250 million for tax compliance to generate $2 billion worth of revenue this year.

Right. According to the US Treasury, the IRS is going to spend $250 million going after people who have under-paid on their taxes and believe they will be able to raise an additional $2 billion from their efforts.

Publicly filed tax liens can destroy your credit as well as wreck careers and businesses.  They can attach to your car, home, other real estate, even accounts receivables if you own a business.  The IRS is ahead of anyone else who may file a lien against you.

Many employers use credit histories to screen applicants, even though credit reports are meant to determine credit-worthiness, not job-worthiness. Repossessions, collections, high credit card balances could cost you the job you want.

Recorded tax liens can seriously hinder your ability to earn a living, pay off your debts, even stay off government assistance!  Once you do the right thing and pay off your tax lien, it can stay on your credit for 7 years.

This is not the news any of us wants to hear, however, our growing monetary deficit is pressuring the IRS to get even tougher.

If I can make a suggestion, pay your tax bills before you pay anything else.

Cheating on Your Tax Return? Someone you trust may get a reward for turning you in!

Cash

Did you know there is a federal rewards program that pays people to turn in others for cheating on their tax returns? Who’s looking over your shoulder? Should you be concerned? And what do you know that the Feds may want to hear?

Many trusted employees have access to records that their employers entrust to them – accountants, bookkeepers, even those being paid to shred documents.

In 2006, Congress directed the IRS to pay increased rewards to informants of at least 15% and as much as 30% of taxes, penalties and interest collected where $2 million or more is brought in.

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