Congress may giveth, but the IRS still taketh away.
Late last year, Congress decided people should be able to get the same tax deductions when they rent apartments to relatives as when they rent to strangers.
This was a reversal of a tax "reform" that applied from 1976, and Congress thought it was wiping out all remnants of the policy when it made the reversal retroactive to 1976. This could mean a substantial tax refund to people who rented to family members but weren't able to claim the full depreciation allowances from 1976 to 1980.
There's only one problem--the IRS says the refund will be retroactive for only three years, to the 1978 tax year.
While Congress specifically made the family rental changes apply from 1976, other statutes allow persons to amend their returns back only three years. Faced with these conflicting laws, IRS lawyers have decided that the three-year refund rule takes precedence, an IRS spokesman said.
A result of this is that anyone who claimed the depreciation illegally in 1976 and 1977 now has been vindicated by Congress. But those who adhered to the law and didn't claim deductions for family rentals won't be able to recoup the difference in taxes for those two years.
There are some exceptions, however: For those the IRS suspects of grossly underpaying or of defrauding the government, their tax returns may be opened for an audit longer than three years back. In that case, the return also is open to amendment by the taxpayer.
Suspected tax evaders, therefore, would be the one group that could report any unclaimed family rental tax deductions all the way back through 1976 and receive refunds on them.