Not reporting rental income

Do you really need to ask about the difference between right and wrong?

Your colleague is playing the audit-lottery where the enrty fee is free, the winnings are minimal, and the cost of losing can be very high.

I know of a hog farmer who got three years in the slammer over $5,000 of unreported income - not to mention the back taxes, the interest, the penalties, and the attorney fees.

Time will tell, won't it? If he's dumb enough to tell you this, he's dumb enough to tell it to someone he's peeved, who will tell IRS, etc. That's one way they could find out. What's really stupid is that if he's barely breaking even in cash flow he probably has a loss for tax purposes. I wouldn't tell him.

-- Phil Marti Clarksburg, MD

He is required to report the income--it's the law--he is filing a fraudulent return when he doesn't. If that's not good enough for him, he should consider these three factors:

1`) a perusal of his bank account, property records, or an audit would reveal the issue. There is no statute of limitations on fraud. 2) he might benefit from filing a Schedule E--up to $25,000 in annual losses can be taken on rental property if certain criteria are met. 3) The IRS is always looking at methods of narrowing the tax gap (the difference between what is collected and what should be collected) with new reporting requirements and new software.

Unless the tenant reports it, which is unlikely unless the tenant is a business, it's hard to see how they'd find out unless they audited him and started going through his bank account statements. Maybe not even then if he doesn't deposit rent checks and cashes them instead. I know casual landlords around here who don't report the income, but don't treat the property as a business and so don't deduct the expenses either. The extra taxable income if they reported it all would be insignificant. R's, John

No

Mike

What are you asking?

Are you asking whether it's "right" for your colleague to not report rental activity? It's neither ethical nor legal. Are you asking whether your colleague is likely to get caught? I'm guessing the answer is no. Your colleague

*probably* won't get caught at it. Your colleague might get caught if the state government looks at the property tax records and sees the properties owned by this person, and somehow figures out that not all the property taxes are showing up on Schedule A. (Of course, if Your Colleague *IS* deducting those property taxes, the situation starts smelling less of laziness and more of fraud.) Or perhaps Your Colleague's tenant gets unhappy with his landlord and files a 1099. Or perhaps Your Colleague gets called in for one of those random TCMP audits they're considering resurrecting. These are fairly unlikely scenarios.

Of course, the penalties of a low probability event could make it worth avoiding. After all, that's why most people buy insurance. Worrying about getting caught certainly is ONE reason that a lot of people just do the right thing.

There is nothing new about people taking income under the table. However, there are many new ways (old ones as well) which lead to discovery of such activity at the local, state, and federal level. Local licensing, property tax rebates requested by the renters, etc often lead such discovery. In any case, your "colleague" is likely cheating him/herself by not reporting the income/expense (including depreciation). Often, these properties offer a tax shelter and provide for the deduction of losses up to $25,0000 from ones adjusted gross income. Tax avoidance is fine. Tax evasion can lead to criminal prosecution. Advise your friend to do what the law requires 'n', if he/she has a conscience, perhaps he/she will sleep a little better.

Yeah, you can cheat on your taxes and if you get away it then you've gotten away with it. You can rob banks, too, and if you don't get caught, you've gotten away with that, too.

He is correct that currently, renters do not report rents paid to the IRS. However, some states have rent credits and I guess it is possible, I have no clue, that in an audit of one of them, it could become known. Not to mention possible rental subsisdy issues, etc. Most of the airlines and auto manufacturers also barely break even but I am pretty sure they file tax returns. None of that is the point I guess except that I have many landlords/property owner clients and a lot of them break even or even lose money on paper, yet they own property valued in the millions. The depreciation not taken is just the first thing that comes to mind that could make this a very complicated situation in the future. If he is just renting a single-hole porta-potty I guess this is no big deal. If he owns a 200 unit apartment complex then maybe it is.

We have an extensive "underground economy" in cash only where no one reports the income and no one reports the expenses. If properly taxed we probably woundn't have a deficit, so these "tax cheats" are costing you and me MONEY. We could stop a considerable amount of it with the FAIR TAX where the tax is based on consumption rather than income, let alone the accounting savings. The regulation of State Sale Taxes is much more efficient than our FET so once the rate is set the system should lower taxes while increasing tax income due to efficiency and tapping the underground economy. People get hostile and nit-pic at FAIR TAX features without considering the tremendous advantages it offers overall. The objections are all hollow when you look at them objectively and in relation to the present mess we have. Our tax advisory boards didn't recommend it because they were directed to find a solution WITHOUT any kind of consumption tax, thereby ruling out any meaningfull insight from that quarter. So, your friend would be taxed under FAIR TAX when he spends the rent to buy grocieries, even though the tenant doesn't report the rental income as a taxable "purchase" (which he should). It creates more tax income than the present system of neither reporting anything. ed

Moderator: While the conjectures of the respondent may have merit, The Charter of the newsgroup restricts tax discussions to current tax laws and those under consideration. Is a national consumption tax under consideration?

There are some state where a renter is allowed to take a deduction for their rent, up to some limit. It wouldn't take a supercomputer to discover a rent deduction at 123 main street, with no corresponding schedule E along with claimed rental income. This scenario hints at both 'wrong' and 'stupid', not sure which is worse. JOE

It's a crying shame there is so much abuse on this. A simple Tax credit for renters would force out billions in unreported income. Why are such simple solutions avoided??

Nichols CBS

Moderator: When logic or simplicity coincide with tax legislation. it means Congress was asleep at the swith.

Or better put: When someon says "Tax Simplification", I reach under my pillow and click off the safety catch on my gun.

This really isn't a forum on how to commit tax fraud. (I think intentionally not reporting rental income could be just that) Also, I think that somewhere in the past week or so, I saw that the IRS put out something on just this topic - underreporting of rental income. So, its safe to say that the IRS is cognizant of this scam of yours. That being the case, expect more vigilance from the IRS in this area. How lucky are you at playing the IRS audit lottery?

___________________________________

-----> real address on hobokeni or hobokenx

You have to be kidding? Of course he's wrong. Besides that there's clearly something wrong with his ethics. Not much difference here and what those guys did at Enron....just a matter of magnitude. Dick Adams mentioned the guy who got 3 years. To show you how seriously the IRS takes provable fraud, one guy overreported expenses by a mere $1000 and got 6 months. Another underreported income by about the same amount. He too got 6 months. The biggest issue here is his lack of integrity.

ANOTHER tax credit to appease a minority. RE already has the best tax credit available with depreciation, Schedule E expenses, and more room for cheating than on a Schedul C or A. PLUS the investment keeps up with inflation and has a high cash yeild. I don't think we have to pamper (payoff with a credit) anyone (them) honest. They'll cheat on top of the credit (ala the Earned Income Credit to entice people to go out an earn money). ed

The idea is that a renters credit would smoke out who receives the rental income, not that the credit would be sufficient to make people not want to cheat. Stu

replying to John L, Ariel wrote: Thank you for the cogent reply...