IRS Will Target Landlords to Help with Deficit

Mar 30, 2011 14 Comments by

The Internal Revenue Service (IRS) will begin to target landlords of the advice from the Treasury Inspector General for Tax Administration. TIGTA monitors the the IRS and often makes suggestions. They recently examined rental activity and the tax revenue generated rental activities.

The GAO reported more than half of taxpayers with rental real estate activity in 2001 misreported their income/losses of $12.4 billion. In 2011 tax year the IRS also plans to require real estate professionals to report the net amount of income earned or lost. They may also require more extensive recording keeping to prove the real estate professional status.

Real Estate Professional Status in Jeopardy?

Taxpayers who claim to be real estate professionals are required to document, on the Schedule E, the amount of income or loss earned from all real estate activity for which the taxpayer materially participates. However, because this amount is not transcribed to the Individual Master File, the MACS program cannot identify taxpayers who have reported to be real estate professionals. Capturing this information would allow the MACS programming to evaluate the reasonableness of a taxpayer’s claim of being a real estate professional. For example, our analyses showed taxpayers claimed to be a real estate professional while also reporting on their tax return that they earned significant income from wages. Real estate professionals are allowed to deduct, from their income, all their rental real estate activity losses without any restrictions. For example, our analysis of these tax returns showed 6 taxpayers claimed real estate losses in excess of $100,000. Taxpayers who do not make this designation are limited in the amount of losses that can be deducted from income. We were advised by the IRS that the cost for transcribing this information would be nominal.

When an erroneous claim is made by taxpayers, it can lead to a loss of revenue for the Federal Government. According to a prior Treasury Inspector General for Tax Administration report,[12] the tax gap was estimated at $345 billion for TY 2001. Of this amount, the IRS estimated that individuals underreported their taxes, related to rental real estate, by as much as $13 billion.

Landlords…In the sights of the IRS.

Here are some of the proposed changes to Schedule E.

The IRS has plans to revise the Schedule E for TY 2011.[11] These changes will increase the amount of information taxpayers are required to report on their tax return related to their rental real estate activities. We reviewed these changes and agree that these revisions will enable the IRS to more effectively identify questionable issues and select tax returns with real estate activity for examination.

The first proposed change will require taxpayers to provide a common description of the rental real estate property (i.e., single-family house, multi-family house, commercial property, personal use, vacation homes, land, royalties, or other). The IRS currently requires taxpayers to describe the type and location of property, but leaves the descriptions entirely up to the taxpayer. This ambiguity can cause challenges for the classifiers when attempting to identify and select tax returns for examination because taxpayers vary in their descriptions and do not use common definitions. This improvement will benefit classifiers because they will have more descriptive data which can be evaluated to identify questionable items on the tax return. For example, the reasonableness of rental property expenses for a single-family home will be different when compared to multi-family properties.

The second proposed change will require taxpayers to provide the actual number of days the rental property was occupied, and the number of days the property was used for personal purposes. Currently, Schedule E does not require the taxpayer to disclose the number of days the rental property was occupied for personal purposes. Figure 5 is an excerpt of the current Schedule E, Part I, reflecting where taxpayers are to provide this information.

It’s estimated that if the IRS audited more returns that contained rental real estate claims, the U.S. Treasury would grow by $27.3 million in the next five years. TIGTA suggests that the audits would help with the ever increasing deficit.

Are you prepared to be audited? Now is a great to time to start the new entity and establish a systematize bookkeeping system to document your income and expenses of your rental activities. If you’re claiming losses as a real estate professional, documentation of those activities should be preserves as scrutiny increases.


Give involved…

What suggestions do you have for the IRS to make up the deficit?

Taxation of un-documented workers…? What else?

Post your recommendation – where should the IRS focus to collect more revenue?
Use the Comments below.

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14 Responses to “IRS Will Target Landlords to Help with Deficit”

  1. Marie Pegram says:

    First try to audit everyone in Congress to make sure they have paid their taxes.

    Second, cut back IRS agents and save money. Businesses have to cut back and still do the same amount of work to maintain a profit.

    Third audit some of the government programs where there is so much waste and fraud.

    • Matt Scott says:


      Great ideas.. but remember, a pig has a hard time trying to kill itself. – Matt

  2. Millie says:

    How about making the welfare available to REGISTERED aliens in registered programs for citizenship and citizens only. That ought to save a bundle.

    • Matt Scott says:

      Don’t get me going on welfare programs….I haven’t eaten lunch yet. Thanks for sharing. – Matt

  3. Darrin says:

    Congress needs to reduce expenses like the rest of us.

    Then eliminate all the special interest deductions.

    Then eliminate subsidies to specific industries.

    Stop the negative income taxes. Refunds to people who don’t pay taxes are just stupid.

    • Matt Scott says:

      Darrin -

      Great to hear from you. Hope all is well in Ohio.

      I love all three… especially number 2 and 3. Earned income credit is like crack for the poor. Why should they try to better themselves when the Gov’t will cut off their $5K check in January for keeping a job that earns $20K a year??


  4. peter robison says:

    Tell Congress to eliminate the thousands of grants and give away programs (read pork) for things the government should never have been involved in the first place, and include a sunset clause on every new program. While they are at it, the U.S military has the ablility kill the whole world 20 times over. The Pentagon waste has to stop, they are the biggest recipient of our tax dollars

    • Matt Scott says:

      Thanks Pete. It’s great to hear from our imports as well. I’ve got your new site and will respond Monday.


  5. Jerry says:

    See 60-Minutes on 3-27-11. Corporations are moving trillions of dollars out of the country because the US has the highest corporate taxes of all the developed countries at 35%. They are establishing their base in Ireland (12.5%) and Switzerland for example. We are losing two ways: one – we get zero tax from these and two these trillions of dollars that are overseas and not here is a significant capital that could be employed in the us economy.

    Aside from that one congressman said that there are no CPA’s in high politics, only lawyers and such. The politicians are not trained in accounting and that explains a lot.

    Thirdly, Americans would not recognize a communist if it stared at them in the mirror. Point in case – FHA has been around more than fifty years.

  6. Butte Bill says:

    Outsource collection functions of the IRS to the Mafia, Crips, and Bloods. Not only will we be putting more local people to work, monies will flow into the Treasury more easily, but the IRS will gain status by working with agencies of a higher class.

  7. Forrest says:

    Be careful not to jump to conclusions here. TIGTA is an independent function tasked to monitor the IRS and report to Congress. TIGTA has no authority with IRS and IRS is free to ignore TIGTA recommendations (until Congress says otherwise). Of course, IRS staff reads TIGTA reports and does implement a portion of the ideas to improve efficiency.

    That said, there’s nothing in these recommendations that is earth-shattering. No policy changes, just urging IRS to do what it should … except that IRS is short staffed and has woefully outdated computer capabilities. (Look at Virtually all tax software already has these features built in, to properly calculate rentals according to the tax law already on the books.

    Truth is that the real estate field has always attracted a disproportionate number of crooks and shysters, because it offers opportunities to make big money. If those people will screw sellers, buyers and lenders, they will also screw the government. The result is that the average American overpays by perhaps 40% to compensate for the tax rip-off artists — what’s called the Tax Gap (see It’s like shoplifting raises the prices for the paying customers.

  8. IRS Targeting Landlords to Help with Deficit | Chuck Congdon says:

    [...] Matt Scott has written a great article on this here:  IRS Will Target Landlords to Help with Deficit [...]

  9. gary says:

    Without a doubt audit the members of Congress. Didn’t Dodd and frank get special favors that should be taxable. How about taxing thier federal retirements as self empployed and having them pay self emploment tax? The middle class (if there is such a thing now) has to pay double taxes for self employment, as awell as a list of taxes and surcharges that no one else does. How about taxing the staff the President has just to set his wife;’s travel agendas? I believe over 500,000 in salriaes just to book trips.

  10. gary says: