Real Estate Professional Audit Question

We recently received this question:

“I am being audited by the IRS for my real estate activities. The auditor didn’t allow my hours for the houses, even though I’m a professional real estate agent and don’t have another job. I work full time. What do I do?”

My first concern about this question is that we’re getting called in so late in the game.

When you first get an IRS notice, you’ll see some questions they have for you and a phone number and extension to call. It’s natural to just want to pick up the phone and give them a call.


The IRS agent is trained with a list of question designed to elicit responses for you that you’re not likely to give once you’re deeper in the audit. From that first call, the auditor determines how much time to calendar for the audit. They determine whether there are other businesses to call into audit. And then decide how many years they’re going to audit.

They decide that all from that very first call.

The first letter contains clues that tells you what Audit Technique Guide (the auditor handbook) is being used. It will also tell you exactly, most likely word for word, what the auditor will ask you. With that knowledge, you can first create a strategy to provide the information truthfully but not volunteer a single thing extra so you don’t turn a little problem into a big one.

Strategy first. Then call. Or better yet, have your tax representative call.

In this case, it sounds like there is confusion on what it takes to be a real estate professional. The auditors aren’t always certain on the rules either, so it’s important that you have impeccable records and can easily demonstrate that you pass all three tests. If you past the first hourly test, which is what sounds like happened here, that is not enough. You must pass the material participation test and the individual qualification test as well.

At this point, it’s best to get an expert helping you right away.

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