Follow the Money:

Your Closing Could Be an Audit Trigger — Here’s How the IRS Sees It

When most people think of the IRS, they imagine audits and paperwork — not criminal agents working alongside the FBI and Homeland Security. But the IRS-Criminal Investigation Division (IRS-CI) is a powerful enforcement arm of the federal government, and real estate is one of its favorite trails to follow.

From luxury home purchases with unexplained funds to “gifted” equity that isn’t reported properly, the IRS-CI routinely uncovers criminal tax activity by analyzing real estate transactions. If you think your closing statement is just a formality — think again.

Real Estate as a Laundering Tool: Clean Property, Dirty Money

One of the most common IRS-CI cases involves individuals or entities using real estate to hide the source of illicit income.

Common Red Flags:

• Homes purchased with cash not supported by reported income
• Funds layered through multiple entities or relatives
• Repetitive buying and selling at inflated or deflated prices

Learn how IRS-CI tracks financial crimes through real estate

“Gift of Equity” Deals with Missing Paper Trails

It’s common in family-to-family sales to offer a discount — a “gift of equity.” But when these transfers aren’t properly documented, they can flag problems on both income tax and gift tax returns.

Triggers Scrutiny When:

• No gift letter is included in the mortgage or closing file
• Gift exceeds the annual IRS gift exemption and is not reported via Form 709
• Property is sold well below market value without explanation

IRS explanation of gift tax rules: When does a gift of equity trigger tax obligations?

Structuring or Smurfing Through Real Estate

IRS-CI also tracks “structuring,” also known as smurfing — where large sums of cash are broken into smaller amounts to avoid bank reporting thresholds.

How it Appears in Real Estate:

• Multiple down payments from different accounts or people
• Several transfers under $10,000 leading up to a purchase
• Sudden influx of funds from unrelated sources close to closing

These patterns are especially suspicious in all-cash or entity-based purchases.

Shell Companies and Fake Deductions

If the property is being purchased or sold through an LLC or trust, the IRS wants to know who actually controls the asset — especially when tax deductions or depreciation are claimed.

Triggers Scrutiny When:

• Owner hides behind multiple corporate layers
• Rental property expenses are exaggerated or fabricated
• Pass-through income isn’t declared properly

FinCEN’s Corporate Transparency Act ties directly into this enforcement
Review new rules on beneficial ownership disclosure

What This Means for Buyers, Sellers, and Agents

Whether you’re transferring a condo to your niece or selling a vacation home at a discount, the IRS-CI may see more than you expect. And in complex deals — especially those involving cash, gifts, or multiple parties — you could easily trigger review without realizing it.

IRS-CI agents don’t conduct routine audits — they build criminal cases. Your best protection is documentation, legal accuracy, and transparency.