Treasury report

Treasury Inspector General for Tax Administration Report: Like-Kind Exchanges Require Oversight to Ensure Taxpayer Compliance

September 17, 2007

The Report is the result of a recent audit conducted by the IRS regarding § 1031 issues. The Report states that there is little IRS oversight of § 1031. The Report concludes that the IRS is relying on taxpayers to voluntarily comply, and this has resulted in underreporting of gain. Hence, § 1031 is a “promising target” for additional research to improve reporting compliance.

The Report also addresses Form 8824. While Form 8824 is not explicitly required to be filed in the language of § 1031 itself, the IRS believes it has the authority to require the taxpayer to file Form 8824 under IRC §§ 6011 and 6012. Form 8824 is just an attachment to the income tax return and is not an information return or a reporting document. Thus, there is no penalty for failure to file Form 8824. However, accuracy related penalties under IRC § 6662 can be assessed if Form 8824 is not filed for a partially taxable exchange that was not reported or disclosed. The Report states that other IRS guidance needs to be revised to let taxpayers know that they need to file Form 8824.

Finally, the Report addresses vacation or second home exchanges. It states that a vacation home used exclusively by the owner or related parties may not be exchanged. When the home is not used exclusively by such persons, or where this is some rental history or attempts to rent, there is no published position by the IRS. This leaves “unrebutted the sales pitch of like-kind exchange promoters” who may encourage taxpayers to exchange non-qualifying vacation homes. Many of these promoters also advise the taxpayer on exchanging primary residences with gain over the IRC § 121 gain exclusion. It also notes that realtors “who may not be well versed in tax law” may advise amateur real property “flippers”, who are really dealers, that these flips qualify for § 1031. Likewise, taxpayers also claim an exchange despite that they’ve taken possession of the cash proceeds from the sale. Unscrupulous or uninformed promoters are taking advantage of the IRS’s silence on the vacation home issue.

The IRS agrees to act on the Report’s three recommendations as follows:

• The IRS will conduct a study of reporting and compliance issues associated with like-kind exchanges based on returns selected by the National Research Program (a comprehensive effort by the IRS to measure payment, filing and reporting compliance). From the study, the IRS will recommend audit target areas for § 1031. Implementation Date: 8/15/08.
• The IRS will revise the following guidance to provide that a taxpayer must file Form 8824 if the taxpayer completed an exchange: IRS.gov Section 11.4-Frequently Asked Questions, Sale or Trade of Business, Depreciation, Rentals, Sales, Trades, and Exchanges (to be posted by 1/1/08); Form 1099-S (Copy B), Instructions for Transferor; Publication 17 (to be implemented by 12/15/07).
• The IRS will provide additional guidance regarding exchanges of second and vacation homes that were not used exclusively by the owners. The request has been submitted and there is no date given for the publication. It will also caution taxpayers to be wary of individuals promoting improper use of like-kind exchanges. It will also provide a Tax Gap Sheet to stakeholders and practitioners about the filing requirements of Form 8824. Implementation Date: 3/15/8.

• What Is A 1031 Exchange?
• What Are Advantages of Exchanging?
• Types Of Exchanges
• Basic Exchange Rules
• 7 Key Exchange Rules
• Who Is 1031 Exchange Services, LLC?
• 1031 Fee Schedule
• Order Free 1031 CD
• F.A.Q.s
• Employment Opportunities
• Resources

• 1031 Fee Schedule
• 7 Key Exchange Rules
• 1031 Worksheets
• Brochure (Consumer)
• Brochure (Real Estate Agent)