For many individuals and investors, real estate represents the largest portion of their net worth. Here at Camuso CPA, we offer a wide array of tax services for real estate investors including tax preparation and tax planning.
Before diving into the details of real estate and taxes, we wanted to ensure our readers that while this article provides helpful and detailed information, it does not constitute professional financial counsel and should not be used as a replacement for tax advice from professional CPA firms. As such, we recommend reaching out to CPA firms for individualized service that is tailored to your unique tax situation.
What Happens If You Do Not Report Real Estate Capital Gains?
Some real estate investors, despite the IRS’s warnings, still choose to hide their profits by not reporting their capital gains from real estate. Purposefully hiding profits and failing to report capital gains can enable the IRS to enforce numerous penalties, such as criminal prosecution, which is generally used in more extreme cases that involve larger profits and capital gains. Those that commit this tax fraud can potentially face up to five years in prison. What’s more, there is generally a fine up to $250,000. Similarly, investors that purposely file a false tax return to hide capital gains may have to pay a $250,000 fine, as well as face up to three years in prison.
Of course, keeping track of all of the real estate income and transactions is not always easy.. While real estate transactions can be complex, the IRS and government fully expect us to comply with the set tax guidelines for real estate. Failing to do so can lead to further complications and issues down the like.
What If You Didn’t Report Capital Gains or Income?
Failing to report your capital gains is something that happens more often than people think, whether it is accidental or purposely. However, reporting these gains is the law and should be done to avoid any trouble. If you failed to report any income or capital gains on your taxes, or if you are uncertain whether or not you compiled within the guidelines set by the IRS, there are certain steps you can take to reduce the risk of being fined, or worse, facing criminal penalties. The right thing to do in this situation is to file your tax return immediately and pay as much tax owed as possible to avoid any additional penalties. While it is dependent on which reporting requirements you are subject to, in addition to the nature of the noncompliance, if you did not report your capital gains it may be best to:
- Create a corrected Form W-2 using Form W-2c if you paid people
- File a corrected Form 1099-MISC if you paid independent contractors
- File an FBAR, or a Report of Foreign Bank and Financial Accounts to disclose foreign assets
- Enroll in the Offshore Voluntary Disclosure Program to help reduce any potential fines and penalties and avoid jail time
- Get help from a qualified CPA firm
While taking these steps can potentially help reduce any fines and penalties, or even protect you from criminal prosecution, if you still have not reported your income and capital gains, it is vital that you discuss your situation with an experienced tax CPA that specializes in real estate. If you have questions about reporting real estate transactions on your taxes, a certified CPA should be able to assist you.
What Happens If You Owe and Do Not File or Pay Your Taxes?
When your taxes are late or not paid, the IRS will assess a failure-to-pay penalty. This penalty goes into effect after the regular due date. Typically, these penalties are a certain interest charge of the balance due for each month or part of a month you are late.
Once the IRS discovers that your taxes are late, they will begin to send you computer paragraph (CP) notices. These notices will show how much you owe and demand immediate payment. If no actions are taken, the notices will continue to pop up in your mailbox for two to six months. If you avoid the notices and still do not pay the owed taxes, the following can occur.
When the IRS seizes your assets, it is known as a tax levy. A tax levy only happens when all forms of communication and arrangements are ignored. The final notice will be sent at least 30 days before further action is taken.
A wage garnishment, also known as a wage levy, is when the IRS contacts your employment provider and demand a portion of your paycheck. This will occur during every pay period until the taxes are paid in full or a payment agreement with the IRS is reached.
A bank levy is when the IRS contacts your bank. When this happens, your bank will instantly freeze your accounts so you are unable to take money out. If arrangements are not made, the bank will send money to the IRS about three weeks later. This of course is something that shouldn’t be taken lightly.
The IRS has the ability to seize various assets like vehicles, houses, boats, and other assets if the owed taxes are not paid and an agreement has not been reached. This is something you will want to avoid, as getting seized property back can often be a long and difficult process.
Passport Revocation or Suspension
Many people don’t know this, but the IRS can revoke or suspend the passports of delinquent taxpayers who owe more than $50,000 in taxes (including interest and other non-payment penalties). Not to mention, the State Department will likely not issue or renew your passport if you owe more than 50K.
If you continue to file a tax return year after year, or you avoid paying the taxes that you owe you could be faced with criminal charges. Criminal prosecution is typically tied to tax evasion or tax fraud and since the government prefers working with non-compliant taxpayers. Since proof of intent to defraud is hard to prove, the IRS looks will generally search for patterns of abuse before taking any case to a criminal investigation
Again, if you fail to pay your taxes, most of these penalties and negative consequences can be prevented by working with a tax professional or the IRS directly.
If you searching for local CPA firms in Charlotte to assist you with reporting income and capital gains, contact Camuso CPA. Whether you need tax preparation services, assistance with properly reporting gains and income from real estate on your taxes or any other service provided by a certified accountant, Camuso CPA can help.