SUCCESS IS NOT THE RED FLAG A successful rental portfolio is not automatically an audit target. Tax returns can be selected for several reasons, including statistical screening, transactions involving other taxpayers, or questions about specific items reported on a return.
The concern begins when the numbers cannot be supported or when different records tell different stories. Here are some examples:
The property management report shows one amount of rental income. QuickBooks shows another. The tax return reports a third. The depreciation schedule does not reconcile with the purchase price and subsequent capital improvements. The loan balance in the accounting records has not agreed with the lender's statement for two years. Payment leaves one related entity but never appears in the books of the entity that received it.
If no one can explain the differences, a bookkeeping problem can quickly become a tax problem.
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