IRS Audit Issues For Real Estate Owners

In recent years, the IRS has audited only about 0.5% of individual income tax returns. Their audit choices have been more high net worth returns and larger businesses with more tax issues. However, based on recent tax legislation, the government has provided more IRS funding to help close the tax gap — the difference between what taxpayers owe and what the IRS actually collects. In fact, several tax proposals rely on revenue received from unpaid taxes to minimize tax increases.

Since audit risk rises with the size of assets and income, it is not a surprise that real estate is often a factor in being part of an IRS audit with many larger taxpayers. The IRS generally uses data from third party information that helps them match smaller tax returns, so they tend to avoid auditing data they already have. Real estate is a long-term asset without much third party reporting nor tracking of deductions for real estate such as depreciation, maintenance and repair expenses.