Hasn't reported rental income for three years

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Patrick Cogan

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Jul 8, 2021, 6:07:07 PMJul 8
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John Smith (not me) earns a living with two part-time jobs. He also has been receiving rental income of $500 per month in cash each month for the past three years.

He has never reported the rental income on his federal or state tax returns. He wants to make things right. What is his best course of action here? Should he fill out 1040X forms? See a tax attorney? In addition to the penalties, fines and interest, is he in more trouble? Thanks.

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Roger Fitzsimmons

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Jul 8, 2021, 11:22:26 PMJul 8
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On Thursday, July 8, 2021 at 6:07:07 PM UTC-4, Patrick Cogan wrote:
> John Smith (not me) earns a living with two part-time jobs. He also has been receiving rental income of $500 per month in cash each month for the past three years.
>
> He has never reported the rental income on his federal or state tax returns. He wants to make things right. What is his best course of action here? Should he fill out 1040X forms? See a tax attorney? In addition to the penalties, fines and interest, is he in more trouble? Thanks.

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?

ira smilovitz

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Jul 9, 2021, 12:52:32 AMJul 9
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On Thursday, July 8, 2021 at 6:07:07 PM UTC-4, Patrick Cogan wrote:
> John Smith (not me) earns a living with two part-time jobs. He also has been receiving rental income of $500 per month in cash each month for the past three years.
>
> He has never reported the rental income on his federal or state tax returns. He wants to make things right. What is his best course of action here? Should he fill out 1040X forms? See a tax attorney? In addition to the penalties, fines and interest, is he in more trouble? Thanks.
>
> --

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

Rick

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Jul 9, 2021, 2:58:22 PMJul 9
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"Patrick Cogan" wrote in message
news:ae35f948-9900-4d23...@googlegroups.com...
>
>John Smith (not me) earns a living with two part-time jobs. He also has
>been receiving rental income of $500 per month in cash each month for the
>past three years.
>
>He has never reported the rental income on his federal or state tax
>returns. He wants to make things right. What is his best course of action
>here? Should he fill out 1040X forms? See a tax attorney? In addition to
>the penalties, fines and interest, is he in more trouble? Thanks.
>

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.

--

Boris

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Jul 9, 2021, 2:58:23 PMJul 9
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Patrick Cogan <pco...@gmail.com> wrote in
news:ae35f948-9900-4d23...@googlegroups.com:

> John Smith (not me) earns a living with two part-time jobs. He also
> has been receiving rental income of $500 per month in cash each month
> for the past three years.
>
> He has never reported the rental income on his federal or state tax
> returns. He wants to make things right. What is his best course of
> action here? Should he fill out 1040X forms? See a tax attorney? In
> addition to the penalties, fines and interest, is he in more trouble?
> Thanks.
>

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.

Patrick Cogan

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Jul 9, 2021, 3:03:23 PMJul 9
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On Thursday, July 8, 2021 at 11:52:32 PM UTC-5, ira.sm...@gmail.com wrote:
> On Thursday, July 8, 2021 at 6:07:07 PM UTC-4, Patrick Cogan wrote:
> > John Smith (not me) earns a living with two part-time jobs. He also has been receiving rental income of $500 per month in cash each month for the past three years.
> >
> > He has never reported the rental income on his federal or state tax returns. He wants to make things right. What is his best course of action here? Should he fill out 1040X forms? See a tax attorney? In addition to the penalties, fines and interest, is he in more trouble? Thanks.
> >
> > --
> 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
Thank you for your responses. I could have been clearer. The roommate rents the room in the owner's home. Thanks.

Tax Guy

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Jul 9, 2021, 3:48:26 PMJul 9
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On 09/07/2021 19:58, Patrick Cogan wrote:
> Thank you for your responses. I could have been clearer. The roommate rents the room in the owner's home. Thanks.

Do you guys have "The Rent a Room Scheme" like we have in the UK? We
don't have to do anything if the total rent received in a year is less
than or equal to Ł7,500.

<https://www.gov.uk/rent-room-in-your-home/the-rent-a-room-scheme>

Rick

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Jul 9, 2021, 4:43:29 PMJul 9
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"Patrick Cogan" wrote in message
news:4d8a325f-5c28-418c...@googlegroups.com...
>
>On Thursday, July 8, 2021 at 11:52:32 PM UTC-5, ira.sm...@gmail.com wrote:
>> On Thursday, July 8, 2021 at 6:07:07 PM UTC-4, Patrick Cogan wrote:
>> > John Smith (not me) earns a living with two part-time jobs. He also has
>> > been receiving rental income of $500 per month in cash each month for
>> > the past three years.
>> >
>> > He has never reported the rental income on his federal or state tax
>> > returns. He wants to make things right. What is his best course of
>> > action here? Should he fill out 1040X forms? See a tax attorney? In
>> > addition to the penalties, fines and interest, is he in more trouble?
>> > Thanks.
>> >
>> > --
>> 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
>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.

--

Stuart O. Bronstein

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Jul 9, 2021, 10:33:50 PMJul 9
to
Tax Guy <inv...@invalid.invalid> wrote:
> On 09/07/2021 19:58, Patrick Cogan wrote:

>> Thank you for your responses. I could have been clearer. The
>> roommate rents the room in the owner's home. Thanks.
>
> Do you guys have "The Rent a Room Scheme" like we have in the
> UK? We don't have to do anything if the total rent received in a
> year is less than or equal to £7,500.
>
> <https://www.gov.uk/rent-room-in-your-home/the-rent-a-room-scheme>

No. The closest thing we have is that you don't have to report rental
income if you rent out your home for two weeks or less during the year.

--
Stu
http://DownToEarthLawyer.com

Maria Ku

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Jul 14, 2021, 9:21:07 PMJul 14
to
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

Stuart O. Bronstein

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Jul 15, 2021, 5:57:24 PMJul 15
to
Maria Ku <maria...@gmail.com> wrote:

> 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).

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.


--
Stu
http://DownToEarthLawyer.com
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