Mortgage interest can be a trap for tax dodgers, says TIGTA
Posted by gailperry in on 09/10/2009 - 11:09
For the past few years at least, one of the key goals of the IRS has been to make the tax burden more fair… not with a flat tax or by simplifying the tax code, but by catching tax dodgers and holding their feet to the fire. With so many people struggling to pay their mortgages and other financial obligations these days, it’s more important than ever that everyone pays what they owe in taxes. That’s why the IRS is expanding its use of one of its analytical tools to ferret out people who earn more than they claim they make on their tax returns. That tool is the Form 1098 on which mortgage interest is reported.
Based on a recommendation from the Treasury Inspector General for Tax Administration (TIGTA), the IRS will put more effort into comparing the mortgage interest that individuals pay (according to the 1098s filed by lenders) with the income they report on their federal tax forms. According to the TIGTA report, too often, the numbers don’t add up. Based on testing of representative samples, it would appear than many people earn too little money to cover the mortgage interest they claim to be paying, even if they had no other financial obligations. Many others pay a bundle in mortgage interest, yet file no returns at all. The IRS wants to know why.
Here are some of the tests TIGTA conducted – using 2005 data -- to find out just how big this shortfall in paid tax might be.
Based on specific criteria, TIGTA representatives took a sample of 1098s showing mortgage interest paid of more than $20,000, and then attempted to match the 1098s to corresponding tax returns. In many cases, there were no tax returns filed. By projecting the results of this representative group to the wider population, they estimate that the unpaid tax amount is somewhere between $352,000,000 and $900,000,000 with 95% confidence … nothing to sneeze at.
A second sample looked at individuals who showed less gross income than they paid in mortgage interest. Again, projecting the results of this sample to the wider population, the estimate of unpaid taxes is between $549,000,000 and $1,053,000,000, with 95% confidence.
While TIGTA did admit that there is no way to know how many of the non-filers in the testing were required to file tax returns, the overall recommendation was that using Form 1098 data to catch tax dodgers is a valuable and worthwhile tool, the use of which should be expanded.
“Information reporting is a key component in IRS compliance programs that are designed to detect and pursue noncompliant taxpayers who underreport income, overstate deductions, or fail to file tax returns,” said TIGTA Inspector General J. Russell George in a statement. “Individuals who fail to file required returns and/or underreport their income create unfair burdens on honest taxpayers and diminish the public’s respect for the tax system.”
The IRS agrees. Matching information reports such as 1098s and federal income tax returns is not new. When discrepancies are found, the IRS routinely contacts about three million taxpayers every year to clear up the differences. But based on the findings of TIGTA, a lot of taxpayers or should-be taxpayers are still managing to slip through the cracks, to the tune of hundreds of millions, if not billions of dollars. As the IRS tightens its procedures… that’s about to change.
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1098s and Mortgage Interest
I can't help but wonder how many of the "sample" of 1098s were owned by politicians. As we seem to see more often is our own congress not paying the correct amount of taxes. We, the average citizen, are expected to pay our share of taxes, and be honest about it. Let's see it work from the top down.
Good Idea, but not at this time
Attempting to use the mortgage interest reported on form 1098 to find under reported income or non-filed returns is about 3 years too late, and perhaps a couple of years too soon. I agree that there are cases where the mortgage interest reported on 1098 forms is excessive when compared to the income reported on some tax returns. However, in this strange economic time, this may not be as unusual as it sounds. There may be instances at this particular time where taxpayers that have made higher incomes in the years before 2008 have seen their income shrink considerably, yet they are somehow managing a sizable mortgage payment which was acquired in better earning years. In some cases, these taxpayers are bleeding off their savings or investmment accounts or possibly even their retirement accounts to meet the obligagions of this mortgage. In some extreme cases, taxpayers may also incur additional home equity debt or other debt to secure the funds to meet the mortgage obligation. This sounds liks sounds like financial Russian Roulette, but some taxpayers actually take this obligation seriously, and will try anything to hold on in the hopes of better economic times ahead. Some will do whatever they need to do to stave off the foreclosure monster. So, to single out these taxpayers because their current incomes may not stack up to the mortgage interest amount borders on harrassment and profiling. What may be more productive is to compare the current mortgage interest amount with income reflected on the previous few years returns to see if the problem was chronic, or recently surfaced due to the economic conditions. Funny, but nobody seemed to care about certain taxpayers income levels when huge mortgages were granted to people that had insufficient means of payment in the first place.