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Upcoming Changes to Schedule E in 2011

On December 20, 2010, the Treasury Inspector General for Tax Administration (TIGTA) issued its audit to the Internal Revenue Service Commissioners for the Small Business/Self-Employed Division and the Wage and Investment Division. The TIGTA made recommendations to IRS management on how to improve their examinations of tax returns with real estate rental income. These recommendations include changes to Schedule E for the 2011 tax year that are aimed at improving the identification of tax returns with questionable rental real estate activities.

One of the proposed changes will require taxpayers to provide a common description of the rental real estate property. Currently, the taxpayers are allowed to describe their rental property any way they like. Taxpayers’ various descriptions make it more difficult for classifiers to identify and choose returns for examination. The proposed change would have taxpayers choose a common description (e.g., single-family house, multi-family house, or commercial property). By using a common description, identifiers will be able to evaluate reasonable expenses for certain rental properties, for example, expenses for multi-family houses compared to expenses for single-family houses or commercial property. 

Another proposed change in the TIGTA audit report will require taxpayers to indicate the actual number of days the rental property was rented and the number of days it was used for personal purposes. Currently, Schedule E only asks for a yes or no if each rental property reported was used for personal use for 14 days or 10% of the total days rented. By indicating the number of personal days, IRS agents will be able to identify returns for review more efficiently and determine if expenses were prorated between rental and personal uses correctly.

Starting in the 2011 tax year, taxpayers with real estate rental income will have a stricter reporting obligation when filing Schedule E. These proposed changes will allow the IRS to better and more efficiently choose tax returns for review with real estate rental income. These changes are part of an overall effort to increase the number of examinations of taxpayers’ reporting of rental real estate activities and improve compliance in this complex technical area.

If you have any questions, please contact Michael Calahan at  mcalahan@BlackmanKallick.com or 312-980-2996, David Lowenthal at  dlowenthal@BlackmanKallick.com or 312-980-2954, or your Blackman Kallick representative. 

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.