Audit: IRS needs to better examine rental real estate

“Given the magnitude of underreporting in our voluntary system of tax compliance,” Russell George, the tax administration inspector general, said in a statement, “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.”

The inspector general looked into the matter because of a 2008 Government Accountability Office report that said that more than half of taxpayers who at least dabbled in rental real estate during the 2001 tax year misreported that activity, leading to $12.4 billion being wrongly reported. (According to the IRS, roughly 7 percent of 2001 individual tax forms contained rental real estate activity.)

For its part, the IRS did not agree with the $27 million figure computed by the inspector general. But it did agree with the audit’s recommendations, including one that called for revising a certain tax form.