Congress should consider making all taxpayers reporting rental real estate activity subject to the same information reporting requirements as other taxpayers with a trade or business, according to the Government Accountability Office.
A new GAO report found that 53 percent of individual taxpayers with rental real estate misreported their rental activities for tax year 2001, resulting in an estimated $12.4 billion of net misreported income. The GAO said that this amount is understated because the Internal Revenue Service knows it does not detect all misreporting during its National Research Project examinations and adjusts the amount of misreporting it detects to estimate the tax gap. Reporting of expenses was the most common type of rental real estate misreporting.
The GAO cited limited third-party information reporting for rental real estate activity as part of the problem. In addition, it said that additional detail might be required on tax returns. “Requiring additional detail on tax returns could also compel paid tax preparers, used by about 80 percent of taxpayers who report rental real estate activity, to obtain more accurate information from taxpayers.”
“You can always improve compliance with increased third-party reporting,” said Roger Harris, former chairman of the Internal Revenue Service Advisory Council and president of Padgett Business Services. “The question is when have you crossed the line and made it too burdensome for the benefit you get. It’s another indication of the complexity of the tax law. For people who prepare their own returns there are rules for rental real estate they have no chance of understanding.”
