IRS Form 8825 CPA advises on Red Flags | Rental Property CPA | Schedule E

Here are some tips I’ve learned as a Form 8825 CPA about IRS red flags on rental property issues. Red flags are variances on your Form 8225 from what the IRS expects. The implication? Red flags initiate automated IRS audits. The IRS establishes baselines for Form 8825 by data mining Form 8825s from other companies, and, from your own (past) Form 8825s.

If you need help with Form 8825 or Schedule E, our virtual office allows us to serve you wherever you live or wherever your rental property is.

Think of Form 8825 from the IRS Perspective

In tax accounting, three methods exist to detect red flags; baseline, horizontal and vertical.

• Baseline means the IRS expects certain ratios and figures with and on your Form 8825, based on other company’s Form 8825. For example, for a single residential property in Raleigh, NC with a purchase price of $145,000 10 years ago, they might expect a $13,000 loss based on the average Form 8825s from 1,000 Form 8825s submitted last year that generally match your price range and locality.
• Horizontal analysis means they compare your 2013 Form 8825 to your past Form 8825s. If for the last three years you averaged a $13,000 loss, a $24,000 loss on the current Form 8825 is a red flag.
• Vertical analysis of Form 8825 means running tax ratios of the current return only. If your cost of insurance is $18,000 on a single residential property, that’s a red flag.

Types of Red Flags on Form 8825 CPAs look for

Usually rental property CPAs first look for things on Form 8825 that shouldn’t be there. Like the $18,000 of insurance cost mentioned above.

But I think that not presenting some expenses also raises red flags. For example, if no insurance expense appears on Form 8825 it could be a red flag. Why? Well if the tax preparer is so inept as to not present an expense that obviously exists, the return could be off on other issues.

Common Red Flags - Sensitive Issues

The IRS publishes Audit Technique Guidelines. There’s one on passive losses. Your Form 8825 CPA has probably read that. The IRS is good about publicizing what they watch for. Or, maybe because I have rental property in my extended family I’m just more aware of it. The IRS prefers to prevent problems. Certainly the new rules on capitalization and expense will be a sensitive topic for the next three years.

How do Rental Property CPAs handle Flags on Form 8825?

• First I find them by running the horizontal vertical analysis described above. Plus common sense of course.
• Then I get your explanation of the issue. Most red flags are just anomalies with valid reasons. Or maybe it was an error we caught early.
• I prepare a supplemental statement to file with your company’s Form 1120-S, Form 1065 etc.
• Occasionally I’ll assemble backup documentation to support the statement.

So if the red flag kicks out your Form 8825 for a closer look, a reasonable explanation is already there to prevent further scrutiny.

Do I need a Form 8825 CPA?

It depends. Rental property taxation is complex, but once you understand the issues for your particular circumstances, Form 8825 might be straight forward. Of course the company’s main tax return, Form 1120-S, Form 1065 etc., all have issues too.

“New IRS regulations offer unique tax positioning for rental property in 2013. Ask your CPA about them.”
- Gary Bode, Form 8825 and Schedule E CPA.