What REALLY Triggers IRS Attention in Real Estate Partnerships - From An Onlooker

[Bruce D. Kowal]

After 20+ years in real estate partnerships, here's what actually puts you on the IRS radar (and what doesn't):

REAL Red Flags That Matter:

1. The Partner Complaint Trigger

• Disgruntled partner files Form 8082
• K-1 disputes
• Partnership disputes leading to tax filings
  Real Impact: Instant IRS attention

1. Suspicious Loss Claims

• Losses exceeding investment
• Artificial basis inflation
• Sudden large losses without economic reality
  Example: $100K investment claiming $500K losses

1. Related Party Games

• Circular property flips
• Below-market transfers
• Family partnership schemes without substance
  Watch Out: IRC §267 and §707(b) violations

1. Debt Engineering Red Flags

• Basis inflation schemes
• Artificial guarantee arrangements
• Partner debt shifts near year-end
  Critical: IRC §752 compliance matters!

1. Syndication Reporting Issues

• Missing Form 8918 for reportable transactions
• Inconsistent investor disclosures
• Required registrations skipped

What Doesn't Actually Matter:
(Despite What Your Uncle's CPA Says)

1. Special Allocations

• Normal promote structures
• Standard waterfall provisions
• Typical developer promotes
  Reality: Unless extremely aggressive, IRS rarely cares

1. Technical Documentation

• Minor §704(b) gaps
• Capital account glitches
• Technical allocation language
  Truth: Unless hiding something bigger

1. Property Value Allocations

• Normal basis step-ups
• Typical appreciation splits
• Standard promote calculations

Real World Example:
🏢 100-unit apartment complex
4 partners, $5M deal
Developer promote structure
= Zero IRS interest

Same Deal With Red Flags:
🏢 100-unit apartment complex

• Hidden partner arrangements
• Artificial loss allocations
• Unreported debt shifts
  = IRS Attention

Practical Protection Steps:

1. Basic Documentation
   ✅ Clean operating agreement
   ✅ Economic substance
   ✅ Partner contributions tracked
   (Don't need War & Peace complexity)
2. Economic Reality
   ✅ Allocations match economics
   ✅ Real money movement
   ✅ Actual partner participation
3. Clean Reporting
   ✅ Consistent K-1s
   ✅ Required forms filed
   ✅ Clear communication

The "Sleep Well" Test:
Can you explain your structure to an IRS agent without sweating?

• Normal promote? ✅
• Standard split? ✅
• Real money invested? ✅
  = You're probably fine

What Gets You in Trouble:

• Can't explain structure
• Hidden arrangements
• Too good to be true tax benefits
• Partner disputes

Bottom Line:
IRS cares about substance over form. Real deals with real economics rarely face allocation challenges. Focus on running a clean operation rather than perfect technical compliance.

Pro Tip: Your biggest risk isn't the IRS - it's partners who might complain to the IRS.

[Bruce D. Kowal]

That's the Big Question, Scott.  IRS criteria shift and move.  

I used an 8082 several years ago with no blowback.  And I was greatly relieved when the three year statute of limitations had expired.  It was three years of "terror" wondering if IRS would follow up either with the Partner or the Partnership itself [to answer your question].  

In that case, the GP, who was a cheating SOB, issued a K-1 allocating cap gains [§1231 gains] to my Client, who was a minority LP.   The allocation was non pro-rata.   While at the same time taking a chunk of cash.  In other words, my Client got hit with a large cap gain, but no cash.  And the GP got cash, and low reported gain.  Pretty nasty, huh?  

So, that 's why we used Form 8082. I imagine that if ALL the LP"s protested with Form 8082, the IRS might have taken note.

I need to write some posts about the Tricks and Traps that some syndicators [not you, of course] use to the detriment of the LP's.

But the Form 8082 is your best friend.  As long as you file it, you have protection from the charge of fraud.

Tip: if you file Form 8082 to protect yourself, send your tax return in by mail.  A nice, large paper return.  With lots and lots of schedules no one asked for.  Attach Form 8082 as the last page on your 100 page + paper return.  Chances are it will never get keypunched.  But you complied with the notification requirements.