Foreign property sale

I have a friend who recently sold a small house in the caribbean. He made a small profit, maybe 10k on a property owned for a few years. He was able to deposit the money from the sale into his bank with a check written from a US bank account (the buyer lived in the US), the amount was not a ton, like 50k. He claims he does not have to pay tax on it since he did so in the country where he owned the house.
I know the IRS gets reports of any deposits of over $10,000 but since this wasn't suspicious and he has not been in trouble in the past what are the chances the IRS will come asking "how did you get that amount of money" and try to hit him up for capital gains tax, or is that just small potatos to them??

[abezon]

Your friend don't know jack about taxes. As a US citizen, he must declare ALL income, foreign or domestic, on his 1040. He can claim a foreign tax credit for the taxes he paid the other country but may end up owing anyway. Failing to report the income could result in fraud penalties.

He should see a good tax pro for assistance next spring. He can reduce his US tax burden by gathering evidence of his basis -- what he paid for the place, any improvements he made (house, driveway, roof, septic, water share), and can capitalize any property taxes he paid over the years IF they were not deducted on his Schedule A. He should also consult a foreign tax pro as there may be ways to reduce his foreign tax burden also. There could also be tax treaty implications.

Its such a small amount that I doubt it needs to be dealt with. He said he talked to an accountant and while foreign property sales are subject to capital gains taxes, its more for investments with much more money involved than this. Best advice is to just not do anything, no paperwork will get sent to the IRS, so their is no red flag on the return. Plus with his income he can easily justify depositing 40k into his bank, its not like it is a check from the bahamas or something to raise an eyebrow.

[abezon]

Wow, that accountant committed malpractice if he really told your friend not the declare the income. I repeat: he must report the sale on his taxes & deduct his basis, paying capital gains on the net profit. If he fails to do so, the IRS could assess $1500 capital gains tax, + 25% penalty + interst & might even disallow the basis & tax him on the gross sale price rather than his profit. If $40,000 isn't enough to raise a red flag given his income, why is he quibbling over $1500 in taxes?

Its like doing 26 in a 25mph zone. No way the IRS is going to even know about it. Bahamas corporation but the buyer lived in the US so when he bought the place he didn't pay via a bahamas check, this was a US check so the only thing that could show up is the deposit and he has a few others that are big deposits also.
Its not like they are going to question one specific deposit into his bank account since everything else on his tax return is always correct and all the forms are their, never a problem.
I think he never knew to declare it before so he doesn't want to even bother now, thats the beauty of foreign proprty ownership, annonymouse!