Hasn't reported rental income for three years

I'm not a tax practitioner, but I think it would be helpful to anyone answering to know more detail. Is this a separate rental property he owns? A roommate who shares his rented home? A roommate who lives in his owned home?

I'm assuming that $500/month is what he receives. There should be expenses as well. It's not obvious whether the rental is a net profit or loss each year. While the correct response from a credentialed tax professional would be that amended returns should be filed, the final decision is up to the taxpayer.

At $6000/year of unreported gross receipts, there is no need to see a tax attorney. If he chooses to file the amended returns, the penalties and interest won't be exorbitant.

Ira Smilovitz, EA Leonia, NJ

What I would do is do a dummy return for one or more of the years just to see if he actually owes any additional tax. It's quite possible that when you factor in expenses such as depreciation and perhaps a portion of mortgage and property expenses, this may actually be a break-even or net loss situation. A lot will depend on whether this is a standalone piece of property like a house or condo or if its shared space like a room in your house or a sub-lease on an apartment or something like that.

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Patrick Cogan snipped-for-privacy@gmail.com wrote in news: snipped-for-privacy@googlegroups.com:

I was once in that position. I had a tax professional file three years of ammended returns, federal and state, and paid the amount due. There was no penalty or interest charges. Your results may vary, but it is said that it's better to go to the IRS than to have the IRS come to you.

When my brother died, he was five years behind in filing tax returns. The IRS and state had been sending him delinquent notices with very large penalties due. I had the same professional firm above take care of filing his back returns, and they negotiated away all of the penalties and interest.

Thank you for your responses. I could have been clearer. The roommate rents the room in the owner's home. Thanks.

As a practical matter, if this is just an informal relationship where the owner is renting out a room let's say to a relative or friend and the $500 cash per month is designed to cover utilities, etc., I don't think I'd worry about it. But if this is a formal rental arrangement and you have a lease and you don't have a relationship with the tenant and the room is only used for the rental etc., then I'd do a pro-ration of the square footage in the room vs. square footage of the house and allocate a portion of house expenses like utilities, property tax, mortgage etc. along with the actual expenses directly attributable to the tenant (for example a dedicated phone line or a cable TV line not used by any other room or say half the water cost of the house if the tenant and the owner are the only occupants of the house) and then do a dummy return to see if there is actual income here. At $500 per month, I'm guessing that once you deduct all possible expenses associated with the rental, it might not be worth reporting.

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Don't forget that whether or not he takes depreciation expense and benefits from its deduction, it (either way) reduces his basis in the house for the depreciation "allowed or allowable", so you better amend the returns to take this deduction, as you'll be recapturing it anyway as part of your taxable gain (@ 25%) when you sell the house eventually (if it's not sold at a loss).

Maria U. Ku, CPA Oakland, CA

Right. But again, if he rents a home out for two weeks or less over the course of the year, no income is taxable and no expenses are deductible. So in that case depreciation isn't considered.