Los Angeles, CA - In this week's MarketWatch.com article I talk about the mortgage interest deduction.
In the course of working on this article, I tried to track down specific information from the IRS. Our taxpayer education coordindator here in LA did some research for me about this and, after a bit of phone tag, we connected this morning.
Here's the scoop:
Yes, IRS has been running a mortgage interest audit project. The details are confidential, but...
They are targeting taxpayers with loans of $1 million and more.
How can they identify this?
- By the amount of interest deduction.
What is the amount of interest that tips IRS off?
- Let me get back to you on that. (Note: TaxMama has heard three numbers rumored - $50,000, $55,000, $66,000)
One office in a beach area surrounded by multimillion-dollar homes was hit recently. The taxpayers (generally spelled 'representative') were incensed to learn that their deductions were excessive. In fact, the reps kept coming back to the office over and over again to argue that the deductions should not be disallowed.
Uh friends, are there still tax professionals practicing who don't know that the mortgage interest deduction is limited to loans of no more than the interest on $1,100,000?
It really IS up to us to look at that Form 1098 Mortgage Interest statement and to ask the questions:
- What is the loan balance?
- Is it all acquisition debt, or improvement debt or remodeling debt, etc.?
- Is this grandfathered debt - pre 10/13/87?
- Was the loan refinanced, with cash taken out - or sent directly to pay off or consolidate debts?
- What was the extra cash used for?
If these questions are new to you, please read the MarketWatch.com article. It has links to the relevant IRS publications.
Beware of preparer penalties - though none were mentioned. This isn't a new law. This law has been around for ages. We are expected to do CPE, not just to kill time or log hours. We are expected to actually learn the current laws we need to implement when we prepare taxes. So if you're assessed penalties on this one, you're going to have a hard time arguing your way out of this box.
Sure, we all fudge a bit when it comes to clients who've refinanced, cashed out, etc. on lower balance loans. But when you look closely at your 'fudges', you'll find you're OK. Rarely did the client pull out more than $100,000 to use for personal loan consolidations, etc.
Often, when they have pulled out more than $100,000, the monies went to improvements, repairs, business expenses, or even to investments. So, you'll find, if you trace the funds, that most or all of the interest would have been legitimately deductible somewhere on the return.
Anyway, take a closer look at your clients' interest expenses this year. Your software probably has a worksheet to help you with the tracing. Use it. (Incidentally, if you attend your software's update classes, or download the recorded training, you'll find guidance on this and other new laws and changes in the software.)