The IRS considers money earned from renting property as a form of income. This means that it can be taxed similarly to other types of income.

The IRS allows landlords to deduct expenses from their reported rental income. For example, a landlord earned $100,000 in rental income last year. They also had $10,000 in qualifying expenses. They will have $90,000 in taxable rental income.

Schedule E, Schedule C, and Schedule 1 are the three primary forms that taxpayers will use to report rental income. A landlord's specific circumstances determine which form or forms they need to attach to their tax return.

Landlords may think they don't need to report rental income to the IRS. Unlike traditional employment income, after all, the IRS doesn't receive a form similar to a W-2 to let the agency know about a taxpayer's income.

What the IRS does have is the Automated Underreporter (AUR) program. This computer program uses information taken from a variety of third-party sources to check tax returns. These third-party sources include public records and property taxes.

Failure to Report

Money earned from real estate rental is taxable income, less any allowable deductions. Failing to report it on a tax return can accrue the same types of penalties and late-payment interest as any other underreported income.

The penalties that a taxpayer-landlord accrues depend on their situation. If a taxpayer didn't file a tax return, they may fall under the failure-to-file penalty. The most common type of penalty for failure-to-file is 5 percent of the total tax due, up to 25 percent, for each month or partial month that a taxpayer fails to file.

If a taxpayer files a tax return but fails to pay all or part of the tax owed and doesn't submit any documents related to payment extensions or payment plans, they may be subjected to a failure-to-pay penalty. Failure to pay is .5 percent of the outstanding tax amount per month, up to 25 percent of the total tax due.

These penalties are in addition to interest that accrues on any unpaid taxes. That a taxpayer is unable to pay their tax debt isn't an excuse. In these situations, they need to work with the IRS to establish a payment plan or pursue other options for addressing their tax debt.

If you have questions about how to report rental income, call Senior Partner, Tax Controversy Attorney, and former IRS attorney Brandon A. Keim at (602) 200-7399 or contact him online to discuss your options.