Kent Anderson
Tax Attorney Eugene
In recent times, the IRS has been auditing only around 0.5% of individual income tax returns, with a focus on high net worth returns and larger businesses facing complex tax matters. Given the intricacies, it’s beneficial for those in Eugene to consider seeking guidance from a tax attorney Eugene specialist. However, with recent tax legislation aimed at closing the tax gap, the government has allocated more funding to the IRS to enhance tax collection. This may increase the possibility of IRS audits, making it important for real estate owners to be prepared. While the administration has promised the IRS will not increase audit activity for taxpayers making less than $450,000, the Oregon Department of Revenue and other state tax auditors have made no such promise. ODR audits may well increase in this sensitive area.
Real estate ownership often attracts IRS audits due to the nature of the assets and income involved. The IRS tends to target returns that lack third-party information, and real estate fits this category since it involves long-term assets with minimal third-party reporting. This vulnerability is susceptible to Oregon Department of Revenue exploitation, and I expect to see an increase in ODR Audits with a real estate focus. In fact, many of our ODR Audits involve real estate issues already.
To be ready for potential IRS audits, it’s essential to be aware of certain audit topics related to real estate. Audit selection can be random or based on specific issues, so it’s crucial not to assume the reason for the audit. Keeping meticulous records of real estate transactions, including acquisition, improvement, and development costs, is crucial to support the overall cost.
When real estate is used for business or rental purposes, it becomes eligible for depreciation deductions. It’s important to calculate and deduct depreciation consistently based on the asset’s useful life, which is generally 27 years for residential properties and 39 years for commercial properties. Additionally, the tax law allows accelerated depreciation for certain building components, making detailed documentation essential for accurate calculations.
Real estate also entails accounting for maintenance, repairs, and other annual costs necessary to keep the property in good condition. These recurring costs are deductible when related to income-generating rental or business activities. However, improper documentation to substantiate these expenses or unclear expenses can lead to tax issues.
For investors in real estate, various factors can limit the deduction of real estate losses. These factors include tax basis, passive investor status, and the structure of the investment. Audits often focus on partnership investments, with the results applied to individual investors later.
Real estate owners involved in like-kind exchanges or Qualified Opportunity Zone investments should be aware that the IRS frequently audits these transactions to ensure compliance with the tax requirements for such opportunities.
Tax Attorney Eugene
If selected for an IRS audit, it’s important to respond appropriately and within the specified deadline. Gather all necessary documentation but avoid volunteering additional records beyond the audit’s scope. Responding properly can help manage the audit process more effectively. Taxpayers must be particularly careful with ODR Audit, as what first appears to be a relatively small exposure can balloon into a much larger problem when additional years are opened ore an IRS audit follows the ODR Audit.
Keep in mind that not all audits result in additional tax liabilities. Some may end with the taxpayer receiving a refund, while others may leave the tax liability unchanged. If you disagree with the audit results, you have options to appeal the decision through the IRS Appeals Office or take your case to Tax Court. Both IRS appeals and US Tax Court have very specific time deadlines and it is easy for a taxpayer to lose important rights if deadlines are missed.
Overall, being informed about potential audit issues and maintaining thorough records will help real estate owners navigate the audit process more smoothly and minimize any potential tax liabilities.