GAO-09-769 Home Mortgage Interest Deduction: Despite …

GAO

July 2009

United States Government Accountability Office

Report to the Joint Committee on Taxation

HOME MORTGAGE INTEREST DEDUCTION

Despite Challenges Presented by Complex Tax Rules, IRS Could Enhance Enforcement and Guidance

GAO-09-769

Accountability Integrity Reliability

Highlights

Highlights of GAO-09-769, a report to the Joint Committee on Taxation

July 2009

HOME MORTGAGE INTEREST DEDUCTION

Despite Challenges Presented by Complex Tax Rules, IRS Could Enhance Enforcement and Guidance

Why GAO Did This Study

Complex home-mortgage interest deduction rules create problems for taxpayers and increase the potential for noncompliance. For example, the rules involve mortgage debt limits and how loan proceeds are used.

GAO was asked to (1) describe how IRS detects noncompliance with the deduction's rules and what IRS knows about the extent of noncompliance; (2) identify problems taxpayers face in complying with the deduction's rules and challenges IRS faces in enforcing them; (3) assess options to give IRS more information to assist enforcement; and (4) determine if IRS's guidance to taxpayers and its examiners provides information to calculate the deduction properly. GAO analyzed IRS enforcement data and interviewed IRS and industry officials. GAO did not consider statutory changes.

What GAO Recommends

GAO recommends that IRS revise its main research program's caseselection system to better detect debt-limit noncompliance; expand information reporting on taxpayers' mortgages; revise tax forms, instructions, and examiner training; and test outreach programs.

In commenting on a draft of this report, IRS agreed with five recommendations and said it will study the recommendations on expanding information reporting and testing outreach programs to reduce noncompliance.

What GAO Found

IRS enforcement and research programs do not provide an overall picture of mortgage interest deduction noncompliance. While its various compliance and research programs provide evidence of some mortgage interest deduction compliance problems, they leave gaps in what is known about the extent and specific nature of noncompliance. In particular, IRS knows little about the extent of noncompliance with various debt limits and rules regarding the use of home equity loans. The case selection system of IRS's main research program also may have excluded possible noncompliant cases. IRS examiners partly attribute noncompliance to taxpayers and paid preparers not knowing deduction rules.

Taxpayers' problems in complying with the mortgage interest deduction rules include the many steps necessary to determine whether mortgage interest and points are deductible and the recordkeeping necessary to determine how the proceeds of home equity loans are used. The deduction's complexity also poses challenges to IRS. Although mortgage interest payments above a threshold are reported to IRS, the information reported shows the dollar amount of interest a taxpayer paid in a year without regard to the limits on the amount of debt imposed by law. As a result, IRS lacks information that could help it efficiently detect noncompliance with deduction limits and must rely on costly examinations.

Several options exist for expanding information reporting on taxpayers' mortgages and using private sector data to enhance compliance. Useful information would include property addresses, debt balances, and an indicator of loan refinancing. This information would allow IRS to identify taxpayers reporting mortgage interest exceeding the acquisition debt limit. Third parties who send information reports to IRS initially may incur some additional costs to provide the data, but those costs are likely to be one-time expenses. Additional loan information from private sector sources also might help IRS detect home equity noncompliance.

The schedule for reporting mortgage interest deductions does not explicitly state that the deduction is subject to limits. Further, IRS's guidance for taxpayers and examiners provides a different interpretation for the acquisition debt limit than a prior tax court ruling, and the examiners' guidance lacks examples of problem areas cited by examiners and practitioners.

The Complexity of Determining the Deductibility of Home Mortgage Interest and Points

View GAO-09-769 or key components. For more information, contact James R. White at (202) 512-9110 or whitej@.

Note: The steps in the table do not reflect other complicating factors, such as interest on home equity debt generally not being deductible in alternative minimum tax computations.

United States Government Accountability Office

Contents

Letter

Appendix I Appendix II Appendix III Appendix IV Appendix V

1

Background

3

IRS's Enforcement and Research Programs Do Not Provide an

Overall Picture of Mortgage Interest Deduction Noncompliance

7

Taxpayers Face a Variety of Problems Trying to Comply with

Mortgage Interest Deduction Rules, and IRS Faces Challenges in

Detecting Noncompliance

10

Options Exist for Expanding Mortgage Information Reporting and

Using Private Sector Data to Enhance Enforcement

14

IRS's Guidance to Taxpayers and Training Materials for Examiners

Did Not Indicate the Range of Possible Mortgage Interest

Deduction Situations

20

Tax Software Differed in the Ease of Navigating Mortgage Interest

Deduction Instructions

23

Conclusions

24

Recommendations for Executive Action

24

Agency Comments and Our Evaluation

25

Scope and Methodology

27

Schedule A, Itemized Deductions

30

Examination Results Involving Mortgage Interest

Deductions

31

Examples Illustrating Mortgage Interest Deduction's

Complexity

32

Descriptive Data on Home Mortgage Interest

Deduction Claims and Form 1098 Filings

36

Page i

GAO-09-769 Mortgage Interest Deduction

Appendix VI Appendix VII Appendix VIII Appendix IX Tables

Margins of Error Tables for Estimates in Appendix V 45

SMR Research's Data on Home Equity Debt and How

IRS Might Use Similar Data for Enforcement

52

Comments from the Internal Revenue Service

54

GAO Contact and Staff Acknowledgments

58

Table 1: Limitations on Mortgage Interest Deductibility by Type of

Debt 4

Table 2: Amounts of Mortgage Interest Deductions, Home Sales

Prices, and Home Equity Debt in 2001 and 2006

6

Table 3: What IRS's Main Research and Enforcement Programs Do

and Do Not Show about Mortgage Interest Deduction

Compliance

9

Table 4: Results of IRS's Fiscal Year 2008 Examinations of

Schedule A, Line 10 for CIP and non-CIP Examinations

31

Table 5: IRS Worksheet to Figure Home Mortgage Interest

34

Table 6: Number and Dollar Total of Schedule A, Line 10

Deductions per Number of Form 1098 Filings, 2004

through 2006

37

Table 7: Distribution of Schedule A, Line 10 Deductions in Select

Percentiles per Number of Form 1098 Filings, 2004

through 2006

38

Table 8: Results of Comparing Total Schedule A, Line 10 Deduction

Amounts to Amounts Reported on Form 1098, 2004

through 2006

39

Table 9: Percentile Distributions for Schedule A, Line 10 Amounts

Compared with Form 1098 Amounts and the Difference

between Schedule A, Line 10 Amounts and Form 1098

Amounts, 2004 through 2006

40

Page ii

GAO-09-769 Mortgage Interest Deduction

Figures

Table 10: Year-to-Year Changes in Amount Deducted on Schedule

A, Line 10, 2004 through 2006

41

Table 11: Year-to-Year Changes in the Number of Form 1098

Filings, with Distribution of Change Amounts on Schedule

A, Line 10, 2004 through 2006

42

Table 12: Numbers of Matching Loan Account Numbers on Forms

1098, 2004 through 2006

43

Table 13: Number of Individual Tax Returns with Schedule A

Mortgage Interest Deductions and Non-Schedule A

Mortgage Interest Deductions, 2004 through 2006

44

Table 14: Margins of Error for Number and Dollar Total of

Schedule A, Line 10 Deductions per Number of Form 1098

Filings, 2004 through 2006

45

Table 15: Margins of Error for Distribution of Schedule A, Line 10

Deductions in Select Percentiles per Number of Form 1098

Filings, 2004 through 2006

46

Table 16: Margins of Error for Results of Comparing Total

Schedule A, Line 10 Deduction Amounts to Amounts

Reported on Form 1098, 2004 through 2006

47

Table 17: Margins of Error for Percentile Distributions for Schedule

A, Line 10 Amounts Compared with Form 1098 Amounts

and the Difference between Schedule A, Line 10 Amounts

and Form 1098 Amounts, 2004 through 2006

48

Table 18: Margins of Error for Year-to-Year Changes in Amount

Deducted on Schedule A, Line 10, 2004 through 2006

49

Table 19: Margins of Error for Year-to-Year Changes in the Number

of Form 1098 Filings, with Distribution of Change

Amounts on Schedule A, Line 10, 2004 through 2006

49

Table 20: Margins of Error for Number of Matching Loan Account

Numbers on Forms 1098, 2004 through 2006

50

Table 21: Margins of Error for Numbers of Individual Income Tax

Returns with Schedule A Mortgage Interest Deductions

and Non-Schedule A Mortgage Interest Deductions, 2004

through 2006

51

Table 22: Types of Transactions Included in SMR Research's Home

Equity Debt Calculations

52

Figure 1: IRS Chart Illustrating How to Determine Whether

Mortgage Interest Is Fully Deductible as Shown in

Publication 936

12

Page iii

GAO-09-769 Mortgage Interest Deduction

 ................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download