GAO Report Finds Rental Income Is Misreported

By Alistair M. Nevius, J.D.

A report by the Government Accountability Office (GAO) has found that at least 53% of individual taxpayers with income from rental real estate misreported their rental income for tax year 2001 (GAO, Tax Gap: Actions That Could Improve Rental Real Estate Reporting Compliance (GAO-08-956) (August 2008)). This resulted in at least $12.4 billion in misreported income, according to the report. The GAO believes that this number understates the actual extent of the problem because the IRS does not detect all misreporting and the study relied on data from the IRS's National Research Program.

The report found that 43% of taxpayers with rental income misreported their expenses, and 15% misreported the amount of rent received (some taxpayers misreported both).

The GAO recommended that rental real estate activity be subject to the same information reporting requirements as other trade or business activities, such as requiring owners of rental real estate to file Forms 1099-MISC when paying expenses and to provide property addresses on Form 1098.

The GAO also recommended requiring more reporting on tax returns. This would presumably require return preparers to obtain more accurate information from their clients and therefore increase compliance.

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