Large change in City Real Estate Tax from 2019 to 2020 to be reported on Schedule E for one property

[eyeman1]

Looking for advice how to proceed.

Bought rental property in 2017 and tax was <$2000 yearly for 2017, 2018, 2019.

In 2020 City reassessed each of those years and sent us tax bills for each of these years for >$20,000 for a total of just under $90,000 taxes due (2017, 2018, 2019 and 2020) We paid those fees in 2020 promptly when City Tax bill received.

I suspect that filing the return will likely prompt the IRS or my State to question the accuracy of the deduction on the Schedule E. If they send a letter for more information that will be easy, but if this prompts AUDIT of the entire return than the amount of work required of me could be quite a substantial time drag.

I mailed in my 2019 in October 2020 and received my refund check yesterday, 50 weeks later. So I am concerned about mailing  in my 2020 returns with an explanation. Unfortunately I can't e-file and put in an explanation (to the best of my knowledge.)

Any feedback is welcome regarding best method to proceed.

[Mike9241]

you could always mail in the return with a letter of explanation. no guarantee can be given that the explanation won't be ignored or just tossed. it's either this or e-file and wait to see if there's an audit.  

[rjs]

The IRS doesn't want explanations that aren't required by the tax rules. If you attach an explanation it's very likely that no one in the IRS will look at it. If they want an explanation they will send you a letter asking for it. And as you said, you can easily prove the correctness of the expense. They are not likely to audit everything in your tax return because of one item.

So my suggestion is to e-file the tax returns and wait to see what happens. There are no guarantees, of course, but I think it will probably be fine.

[Critter-3]

You CAN efile the 2020 return ... since the IRS took so long to process the 2019 return simply enter a ZERO for the AGI when asked. 

[Carl]

Real estate taxes, sometimes referred to as property taxes, are claimed in the tax year they are actually paid. It does not matter what year is paid *for*. So if you paid $90K in property taxes in 2020, that's what you're report on your 2020 tax return.  If they IRS want's any explanation, then they will specifically ask you for it. Including information with your return that the IRS does not require or has not specifically asked for, generally will tend to hold up the processing of your return moreso than if you just wait until the IRS asks you for more information or clarification.

If the IRS conducts an audit, then the only reason that would be of any concern to you would be if you're trying to hide something.... and you're not doing that.

[eyeman1]

so why zero versus the AGI for the 2019 return since I got the refund check for 2019 dated 9/30/2021

[Carl]

so why zero versus the AGI for the 2019

Because if the IRS has not processed your 2019 tax return yet *and* entered it in their system, the IRS computer doesn't have an AGI for 2019 *in their computer*. So you enter zero. Sometimes you have to go one step further and tell the program that you did not file a 2019 tax return and let the program enter zero for you.

Typically, the order is:

1) Enter your final AGI from the 2019 return (I say final, because if you amended the 2019 return, that can change your AGI)

2) If that doesn't work, enter the AGI before you amended the return.

3) If that doesn't work, enter zero for the 2019 AGI.

4) If that does't work, tell the program you did not file a 2019 return.

5) At this point if nothing above works, you have no choice but to print, sign and mail the return to the IRS.

The IRS computers only allow you 5 attempts to e-file the return. After the 5th failure you have to mail it - even if you do have the correct AGI after the 5th failure.

[eyeman1]

Thanks for your directions! Since the IRS sent a significant refund with a significant interest payment 1 business day ago, would this not suggest that they had entered my return into their computers 50 weeks after submission?

[Critter-3]

No.... the AGI had to be set in place LAST year prior to 11/1/2020  so they do NOT have it in the system for 2020 efiling.   Trust us ... use a ZERO. 

[eyeman1]

thanks for this data!

[Carl]

would this not suggest that they had entered my return into their computers 50 weeks after submission?

Nope. It wouldn't suggest that at all. While they may have processed the return and sent you your refund, that does not in any way mean that data has been entered into the computer system. Now I don't know this for a fact, but it would not surprise me if they had things set up so that processing is not complete until the paper check they mailed you actually clears. How they deal with it for an ACH electronic transfer, I just don't know.

[eyeman1]

I guess it makes sense to start with AGI of zero for 2019 for this 2020 efile...

does the following note from IRS in February 2021 imply anything different makes sense:

CP05

Message about your 2019 tax return

We're holding your refund until we finish reviewing your return.

Is the message I am getting from this message board that reviewing the return from IRS and the input into their computer system occur in that order rather than inputting than reviewing?

[Critter-3]

Once the return has been completely processed  then the AGI is recorded into their system  HOWEVER  the IRS uses a cut off date for the efiling reference data base.  As I said before the cut off date was way back in 2020 so any returns 2019 returns processed after that cut off date will never be reflected in that list for efiling a 2020 return.  That is just the way the IRS system works since they are using antiquated equipment and that reference list is simply  not updated in real time.