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IRS mortgage interest deduction

High Mortgage Interest Payments May Be Useful to Pursue Potential Nonfilers and Underreporters

Among the widely reported factors contributing to the high default rate in the home mortgage industry are individuals who may have assumed mortgages requiring payments that exceeded their ability to pay. We recognize that, given the current state of the economy, many individuals are struggling to meet their mortgages and other financial obligations. Nevertheless, a large number of individuals are paying a significant amount of mortgage interest and either are not filing tax returns or are filing tax returns indicating their income is not sufficient to cover their mortgage obligations and basic living expenses. The considerable difference between expenditures and income raises very serious questions about whether these taxpayers have additional sources of income that should have been reported on their tax returns.

The IRS may be able to enhance its efforts to address taxpayers who are making high mortgage interest payments, but are not filing tax returns

To its credit, the IRS recognizes the potential benefits of incorporating Forms 1098 into its compliance efforts and is using the documents in its Collection function to bring nonfilers into compliance. Under the Collection function Return Delinquency Program, nonfilers who meet specific income and mortgage interest criteria are being identified and sent notices requesting that they file their tax returns or provide explanations as to why they are not required to file. Taxpayers who are required to file, but have not done so after receiving these notices, may be sent to the Automated Collection System and/or the Collection Field function for further contact. If a taxpayer still refuses to file and the case meets the high income referral criteria, the Collection function may refer the taxpayer to the Examination function to have a "substitute" tax return prepared for them.

IRS statistics for Tax Years (TY) 2004 and 2005 combined show that Forms 1098 have been used as the basis to open cases and issue contact letters to 227,019 potential nonfilers soliciting that they file their tax returns or explain why they do not need to file. Although most (54 percent) of the potential nonfilers have yet to respond to the contact letters, statistics provided to us by the IRS indicate 69,693 delinquent returns have been received and processed. The tax assessed on 28,026 TY 2005 returns filed after nonfilers had received a delinquency notice from the IRS because of mortgage interest conditions totaled $276 million.4 While the Return Delinquency Program is experiencing success in identifying potential nonfilers, our Mortgage Interest Data Could Be Used to Pursue More Nonfilers and Underreporters Page 4

samples of Forms 1098 show the documents may also provide good audit leads for the IRS Examination function. These leads could be used with other sources of information to pursue additional potential nonfilers as well as underreporters who might otherwise not be pursued due to resource constraints.

Posted Tuesday Sep 01