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Treasury Inspector General for Tax Administration

Press Release


March 9, 2011
TIGTA - 2011-12
Contact: Karen Kraushaar
(202) 622-6500
karen.kraushaar@tigta.treas.gov
TIGTA-PAO@tigta.treas.gov

TIGTA Report: The IRS Should Increase Its Examinations of Tax Returns With Losses From Rental Real Estate Activity

WASHINGTON – The Internal Revenue Service (IRS) should increase its examinations of individual tax returns that report losses from rental real estate activity, according to a new audit report released publicly today by the Treasury Inspector General for Tax Administration (TIGTA).

TIGTA’s report, “Actions are Needed in the Identification, Selection, and Examination of Individual Tax Returns with Rental Real Estate Activity,” was conducted because a Government Accountability Office report in August 2008 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.

The objectives of TIGTA’s review were to evaluate the IRS’s coverage of individual tax returns with rental real estate activity and to recommend changes to aid in the identification, selection, and examination of tax returns with rental real estate activity.

TIGTA found that during Fiscal Years 2008 and 2009, the 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 projected that if the IRS increased the percentage of rental real estate CIP tax returns it examined, it could increase the potential tax assessments 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 Treasury Inspector General for Tax Administration.

IRS management agreed with all of TIGTA’s recommendations, disagreeing only with the proposed monetary outcome measures.

To view the report, including the scope, methodology, and full IRS response, go to: http://www.treas.gov/tigta/auditreports/2011reports/201130005fr.pdf.

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