The IRS continues to batter real estate professionals with audits for things that have already been changed in the tax law but have not been updated in the guide that an IRS officer would use to conduct an audit.
Real Estate Tax Law Audit
The guide that the IRS officer uses to audit a taxpayer is called an Audit Technique Guide; a large portion needs to be updated to fix the problems that are occurring within the audit process. Below I will talk about two of the larger problems facing real estate professionals that have been contacted about being audited.
Limited Partnership Problems
The first problem will occur if you are a limited partner in a limited partnership and that partnership is holding real estate. The IRS officer using an outdated guide will claim that you cannot materially participate in the partnership and since you cannot all your income is either passive income or passive loss. At the end of 2011 the IRS changed the regulations and it now states that if a limited partner is treated as a general partner then he can materially participate in the partnership.
Misinterpretation of The Law
The second problem is occurring because the IRS officer is misinterpreting the law when it comes to real estate professional’s hours. The first test is at least 750 hours of general real estate activities and this has to be more than any other business activities that the taxpayer conducts. The second test says that a taxpayer much materially participate in each property. This includes 500 hours per property per year that must be conducted to be considered a real estate professional.