Thursday, Sept. 3
Posted: 3 p.m.
Every homeowner (and wannabe homeowner) knows the tax value of a residence.
The Treasury office in charge of keeping an eye on the IRS (I like to think of it as this blog's government counterpart) says the tax collector needs to pay more attention to a key home tax break, too.
An analysis by the Treasury Inspector General for Tax Administration, or TIGTA, found that one easy way the IRS could catch more tax cheats is to do a better job of checking 1098 forms.
You own a home. You pay a mortgage. You say you've never gotten a Form 1098.
I bet you have. It's just that it might not have been called that.
The 1098 number is the official IRS name of your mortgage interest statement that you get each January from your lender. That's the document that tells you, among other things, how much interest you paid on your home loan.
As with every other reporting form (such as 1099s and W-2s for income), a copy of your Form 1098 -- or "substitute" as most are named since the lenders use their own software programs to track and print the data -- goes to the IRS.
TIGTA auditors found the IRS is not taking full advantage of mortgage statement information that could help it identify folks who are either not filing their taxes or underreporting their income on their tax returns.
In a random sample of 2005 tax year potential return nonfilers, TIGTA says 21 of the individuals might owe a collective total of up to $177,715 in delinquent taxes. From that, the IRS could get another $107,209 in penalties and interest.
Another random sample of 100 folks who did file indicated discrepancies in their income and mortgage expenses. Of that group, TIGTA found 37 individuals who might collectively owe $265,018 in additional taxes and $61,233 more in penalties and interest.
Essentially, the filers in this second group are claiming much more in mortgage interest deductions than their reported income amounts would seem to support. Now I know a lot of people in the last few years have bought more house than they can afford, but I agree with TIGTA. It behooves the IRS to take a closer look at someone who's claiming, for example, income of $15,000 and deducting more than that in mortgage interest payments.
So let's review. TIGTA looked at mortgage statements on 200 random folks and 58 of them were problematic. And by problematic, I mean left a potential $611,175 in taxes, penalties and interest on the table.
And that's just 200 returns. Multiply that by the millions of homeowners who have mortgages and the IRS could rake in a pretty penny from errors and downright fraud in this area.
Not surprisingly, the IRS agreed with the TIGTA recommendation.
"We concur with your recommendation and agree that we should explore the feasibility of making greater use of mortgage interest data to pursue additional nonfilers and underreporters for audit," wrote Christopher Wagner, commissioner of the IRS' Small Business/Self-Employed Division, in a letter to TIGTA.
If you're a homeowner who claims mortgage interest, good for you. It's a legitimate tax deduction. The IRS doesn't want you to stop claiming it. It just wants you to do so correctly.
So do I and every other law-abiding taxpayer. When some folks don't pay their share, either because of simple mistakes or intentional tax evasion, those of us who do have to eventually make up the difference. And trust me, that is something we'd rather not do.