Tax return size --- an audit flag?

Question

Is having a ton of rental properties & installment sales in a massive 1040 tax return - an IRS audit flag??

I have about 60 rentals and 25 installment sales. I'm continuing to add more over time. Most are cheapie properties, in rural Kansas. However they make money. I'm at a point where the profits buy me 1 or more new properties. a month.

The problem is my tax return is HUGE. This year it was over 250 pages.

My CPA seems smart, and has done IRS representation, and I'm honest and we keep good records - so I am not really worried about an IRS audit if it happens. A matter of fact, I had one a decade ago, a full IRS field audit, and passed owing $0.

Eventually I want to have a couple hundred properties, and more installment sales. This is something I want to pass on to my children, or sell when I'm old if they have no interest in 'em. All are in my single member LLCs, so they pass directly through to my 1040 ... so I have a lot of schedule Es, 6252s & a ton of "Section 1.263(a)-1(f) de minimis safe harbor election" statements. I thought about doing a partnership return with my wife since partnership returns are audited less, to reduce the size of my 1040, but my CPA said it was not worth worrying about.

Thanks in advance for any feedback.

Michael Plaks · Answer

@Joe Scott

One of those rare cases when size does NOT matter. :)

If anything, it's a disincentive for an auditor to dive into such complexity.

BTW, there should only be one de minimis election statement for the entire return.

Benjamin Weinhart · Answer

Hi Austin, just adding my 2 cents. Of course, having 1 statement or 30 doesn't change things from an audit perspective. I like including the supplemental sheets to tax returns I create. I never do it with the intention of making a tax return longer and will, of course, remove unnecessary pages if they're truly useless. The main reason I do it is that if a client does move on to another tax pro next year, a lot of detail that they'd ask for can be found in those supplemental sheets. I suppose it's a lot easier for me to say/do this because I operate 100% electronically, but even if someone only looks at the sheet for a few seconds to answer a question, then I think it's worthwhile to include them. Or maybe the software(s) I've used don't really generate much fluff, haha.

Just my way of setting someone up to be the best prepared they can be, even if our relationship doesn't continue to the next year for whatever reason.

That being said though, I think there is a bit of a stigma when it comes to # of pages on a tax return and complexity. I think I could make a return 1,000+ pages if I really wanted to, for whatever reason, for a simple small business owner, and 90-95%+ of the return would be useless/unnecessary. I imagine some bad apples will do this and charge by the page rather than the complexity, but I'd like to think that the majority operate in good faith.

Jason Malabute · Answer

The size of your tax return, whether it’s 250 pages or more, doesn’t inherently increase your chances of an audit. The key factor is ensuring you have proper documentation to support all the transactions, deductions, and income reported. As long as you and your CPA maintain thorough and accurate records, you should be in good shape. The IRS focuses more on discrepancies, missing information, or suspicious patterns rather than the sheer volume of the return itself.

It’s great that your CPA is knowledgeable and has handled IRS representation before. With solid records and compliance, there’s little reason to be overly concerned about the size of the return.

Account Closed · Answer

Hey Joe, Having a large number of rental properties and installment sales can certainly make your tax return voluminous, but as long as you're maintaining accurate records, filing everything correctly, and reporting all income, the size of your return itself is not necessarily an audit trigger. The IRS typically selects returns for audit based on unusual or suspicious patterns, not the sheer length of a return. In your case, with a history of passing audits and having a CPA who is experienced in IRS representation, you're in a strong position should an audit occur.Regarding audit statistics, the IRS generally audits fewer than 0.5% of individual returns, with even lower rates for those earning under $1 million annually. In fact, those with incomes under $1 million have about a 0.2% chance of being audited, with the rate increasing slightly as income rises. The key factors that may raise audit risk are discrepancies in reported income, excessive deductions that appear out of line with your income level, or unusually complex transactions. Since your CPA is advising that your current structure is sound and not worth changing, it seems you're well prepared, especially with your past audit experience.

Aus Smith · Answer

Hey Ben,

I reference my old boss because I have never seen this practiced myself. I would imagine most of the time the bloated returns are a result of not suppressing unnecessary pages. However, I have seen a simple return with supplemental documents that are simply blank that should be supressed. I assume a tech savy tax pro would not come across this though. I agree that all carryover data should be provided regardless of how bloated the return is. I usually have to request at least one or two omitted documents for carryover data such as depreciation schedules and what not.

I am pretty happy when provided this information from prospective clients beforehand, so thank you for considering future tax pros when providing your tax preparation!

Cheers and thanks for the reply!

Aus Smith · Answer

Hey,

To add to my fellow accountants, size does not matter. The first CPA I worked for told me that tax preparers who are unconfident would print every page generated by the tax software, to make a return look bigger even though it was bloated with unnecesaey supplemental sheets that provided little to no value. He called them stocking stuffers, because the client would file those pages away and never see them again.

You would not believe how large a small return would look like with these printing options. Fun question. Thanks for providing me the opportunity to provide my perspective. Cheers!

Austin L Smith, CPA

Jonathan Feliciano · Answer

Hi Joe. I agree with Ben. Generally, people with high income on their 1040 have a greater change of being audited by the IRS. Still, the probability is very small. As long as you have documentation to back up the figures on your 1040, you'll be fine. Also, I agree with your CPA's decision to not do a partnership with your wife; it really wouldn't change your probability of being audited. Again, the IRS looks at your level income, not the number of pages on your 1040. Think about it: The IRS has a greater chance of winning money if they audit someone showing $10 mil of total income on their return versus $100,000. I hope this helps.

Ben Trageser · Answer

@Joe Scott

There are plenty of people with huge returns. As long as things are done correctly and you have documentation to back it up, you should be fine. Is there a higher chance the IRS may questions things? Possibly but as long as you have everything in order, you’ll be in good shape.

Tax return size --- an audit flag?

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