The tax rules for real estate investors are some of the most complex in the Tax Code. The regulations seem like they were drafted by congressional attorneys—which they were. By creating such a system, Congress granted a huge advantage to the IRS.
The Tax Code requires compliance that even IRS accountants fail to meet. The IRS can get away with it, but when you’re audited, you’ll need to provide records to prove your deductions and documents that support the particular tax strategy selected.
The IRS knows that few are able to comply with the regulations. By the time an audit concludes, most people will owe additional taxes. If for some reason you happened to be one of the few with proper records, the IRS would try to trip you up some other way.
We’ve have been preparing taxes and representing clients in IRS audits for thirty years and we’ve never met a real estate investor yet who was doing everything correctly.
Real estate audits are one of the lucrative ways for the IRS to collect more dollars from the average citizen. Real estate activities are by nature BIG ticket items. Each win by the IRS brings in more tax revenue for the government.
One of the tricks used by the IRS to get more dollars from you is that after you agree to the additional taxes for the year being audited, the auditor will often make the same adjustments for the other two open tax years.
For example, if you agreed to an additional $4,500 in taxes for the audited year, the total tax would increase to $13,500 (if each year the amounts were the same). After interest and penalties are added, the grand total owed would be about $16,500! And you thought you were agreeing to only $4,500.
Of course you could challenge the additional adjustments, but that would require you to prove the IRS wrong, which could open the other two years to audit. That’s probably not a good idea, especially when you failed to do that very thing during the audit.
At Incompass, we attempt to educate clients about the records required to support the particular strategy implemented. We want you to get every tax benefit allowed, but we also want to protect your benefit when challenged by the IRS.