IRS Intensifies Attack Against Real Estate Professionals

Special Report: IRS Intensifies Attack
Against Real Estate Professionals

by Diane Kennedy, CPA and Tax Strategist

It looks like the IRS has hit pay dirt with their targeted audits of real estate professionals and real estate investors. From the emails and phone calls we've received, the number and voracity of the audits against real estate investors and real estate professionals is increasing.

The term Real Estate Professional, when used by the IRS, has to do with whether you can take advantage of real estate losses against other income on your return. It's been a popular loophole for real estate investors over the past few years. Here's how it works:

If you have real estate losses, you can only take $25,000 of the loss against your other income if you make less than $100,000. If you make more than $150,000, you can't take any of the loss.

That's where the Real Estate Professional status comes in. With this status, you can take all of your losses against your income, no matter how much the loss is and no matter how much your income is. [Get a more detailed explanation here: The Real Estate Professional Tax Loophole]

The kinder, gentler IRS is gone

Now here's the bad news you might have already suspected. The IRS is no longer the kinder, gentler IRS. We have the third new commissioner in as many years, and I'm afraid he wants to make his mark with collection revenue. We've been hearing about the increasing number of IRS audits and the hard stand they have been taking. Some of the horror stories we've heard:

Real estate agents denied the Real Estate Professional status because they are not brokers.

Hours spent looking at property not allowed because this is considered an "investment."

Tax preparer misses an important election, and there is no going back for taxpayer.

LLC Operating Agreement misses key phrases and is used against the real estate investor. End result: $50,000 in taxes, interest, and penalties!

So, this is what we know: The IRS is targeting Real Estate Professionals. The timing couldn't be worse. At a time of dropping home values, tightened credit, and a general malaise in the housing market, an aggressive IRS audit specifically targeting the people who are suffering the most can't be good for anyone. But the IRS has their job, too, and that's to raise tax revenue.

Back in July, we got a copy of the IRS audit handbook they are using for these new aggressive audits. We've heard reports of teams (yes--teams!) of auditors showing up to hit the unsuspecting taxpayer with a barrage of rapid fire questions. Having this handbook is like having your opponent's play book the day before the big game.

The best way to beat an IRS Audit is
to prepare with their play book in hand

The questions they'll ask and the documents that they'll ask to see are all straight out of this handbook. If you have a copy in advance, PLUS have all the materials they're going to ask for, you'll have a much, much easier time of it.

[Note: The IRS audit handbook, plus the step-by-step answers and preparation tactics, are all part of the IRS Survival Guide for Real Estate Professionals with Real Estate Investments.]

Since July, we've spent hundreds of hours researching and documenting the additional tools you need to prepare for that IRS audit notice. One of the things that the IRS auditor will ask to see will be a copy of your Operating Agreement for your Limited Liability Company (if you have an LLC).

There are very specific real estate professional and material participation clauses they are looking for in the Operating Agreements, and if they don't see them, that's a big black mark against you in the audit. In fact, don't have these items and it might cost you tens of thousands of dollars in an IRS audit.

So, if you had real estate investments and took losses in the past few years, be prepared for an IRS audit notice. The auditor teams are ready. Don't get caught unaware!