You’ve likely encountered clients who assume they qualify as real estate professionals, but assumptions alone won’t hold up under IRS scrutiny. You must accurately determine who meets the material participation and hourly thresholds under §469.

With the right guidance, you can help clients implement grouping strategies, maintain proper documentation and make key elections to transform otherwise non-deductible passive losses into allowable deductions.

Below, you’ll find a few of the top questions and answers from a recent webinar on the topic. View the on-demand version of this webinar now for immediate access to the full recording and entire list of Q&As.

Q: What are the three tests to meet real estate professional status?

A: The taxpayer must (1) spend more than 50% of their personal service time in real property trades or businesses, (2) work more than 750 hours in those activities and (3) materially participate in each rental property, unless a grouping election is made.

For married filing jointly (MFJ) returns, you can’t combine both spouses’ time for the first two tests. However, once real estate professional status is established, both spouses’ time counts toward material participation.

Q: Is real estate professional status permanent once achieved?

A: No. Real estate professional status is determined annually. A taxpayer may qualify in one year but not the next if their facts or time commitments change.

Q: What activities count toward the 750-hour rule?

A: Only the time the taxpayer personally spends on real property trades or businesses counts. Qualifying activities include repairs, rent collection and property oversight. Time spent on passive investment activities, such as reviewing financial reports, doesn’t count.

Q: Do hired contractors’ or property managers’ hours help meet the “most hours” material participation test?

A: No. In fact, their hours count against the taxpayer in that test. To qualify, the taxpayer must show they spent more time on the activity than any other individual, including paid help.

To learn more about the tax considerations for real estate professionals, watch our on-demand webinar. NATP members can attend for free, depending on membership level! If you’re not an NATP member and want to learn more, join our completely free 30-day trial.

Question: Jeff is the 100% owner/shareholder of an S corporation that provides psychiatric services to hospital patients, both on-site and through telehealth. He does his own bookkeeping and office management. No one else works for him. How is reasonable compensation determined for Jeff?

Answer: Jeff must pay himself a reasonable wage before taking any distributions from the S corporation. The IRS requires that shareholder-employees be paid a salary commensurate with the services they provide. Jeff wears two hats: he’s a practicing psychiatrist and his office administrator.

To calculate reasonable compensation, he should use benchmark data such as the Bureau of Labor Statistics or medical industry surveys to determine average pay rates for each role. He then must estimate how much time he devotes to clinical work versus administrative tasks and multiply those hours by appropriate rates.

If he works 40 hours a week, spending 30 on psychiatric care at $130/hour and 10 on administrative duties at $25/hour, a defensible annual compensation level would be around $215,800 [($130 x 30) + ($25 x 10) x 52]. Failing to do so could lead to IRS scrutiny, wage reclassification and unexpected payroll tax assessments.

Some taxpayers are receiving CP59SN notices even though they filed valid extensions for their 2024 returns, pushing their due date to Oct. 15, 2025. This appears to be part of a broader issue within the IRS’s notice system. As a trusted tax professional, it’s important to understand what’s happening and what to communicate to clients.

What is a CP59SN notice?

A CP59SN notice is sent by the IRS when its records indicate a taxpayer has not filed a return. The “SN” variant refers to specific groups of nonfilers, often identified by third-party information the IRS has received, such as W-2s or 1099s. These notices are designed to prompt taxpayers to file or provide an explanation.

Why the notices are problematic

There are reports on social media of multiple instances where taxpayers received these notices despite filing a timely extension with the IRS earlier this year. These extensions give taxpayers until Oct. 15, 2025, to file their returns. In addition to these accounts, the AICPA has reported that it is in communication with the IRS regarding the issue.

The issue seems to stem from the IRS not properly recognizing or processing the extensions before issuing the CP59SN notices. Although the IRS has not released an official statement acknowledging a systemic error, the consistency and timing of these reports indicate this may be more than isolated incidents.

What you should do

If your clients receive a CP59SN notice despite having a valid extension on file, here’s how to respond:

Confirm the extension

Review your records and confirm that the extension was filed and accepted. If you submitted it electronically, you should have an acknowledgment receipt.

Check the client’s IRS transcript

Use your IRS e-Services account to view the taxpayer’s account transcript. This will show whether the extension was received and processed.

Advise the client not to panic

Reassure your client that if a valid extension was filed, they are not in violation and the notice is likely incorrect.

Respond if necessary

While not always required, you may choose to respond to the notice with a copy of the extension acknowledgment to help prevent additional notices or confusion.

Continue monitoring the IRS for updates

If the IRS formally addresses the issue, we will share the update with our members.

NATP is listening

We’re actively monitoring this situation and encourage members to report any additional instances. Your experiences help us advocate for clear communication from the IRS and practical resolutions for issues that impact your clients.