Treasury
Inspector General for Tax Administration
Office of Audit
MORTGAGE INTEREST DATA COULD BE USED
TO PURSUE MORE NONFILERS AND UNDERREPORTERS
Issued on August 6, 2009
Highlights
Highlights of
Report Number: 2009-40-112 to the
Internal Revenue Service Commissioner for the Small Business/Self-Employed Division.
IMPACT ON TAXPAYERS
Individuals
who fail to file required returns and/or underreport their income can create
unfair burdens on honest taxpayers and diminish the public’s respect for the
tax system. TIGTA recognizes 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 are either not filing tax returns or are filing
tax returns reporting income that is not sufficient to cover their mortgage
obligations and basic living expenses.
The considerable difference between income and expenditures on these
returns raises serious questions about whether additional income should have
been reported.
WHY TIGTA DID THE AUDIT
The
objective of this review was to determine how effectively the Internal Revenue
Service (IRS) uses Mortgage Interest Statements (Forms 1098) to identify
unreported income.
The review was initiated as part of our planned Fiscal Year 2009 audit
coverage under the major management challenge of Tax Compliance Initiatives.
WHAT
TIGTA FOUND
To its credit,
the IRS recognizes the potential benefits of incorporating Forms 1098 into its
compliance efforts and is using these documents in its Return Delinquency
Program. While this Program is
experiencing success in identifying potential nonfilers, our samples of Forms
1098 show the documents may also provide some good audit leads for use in the
IRS Examination function.
TIGTA evaluated
2 statistically valid samples of 100 individuals with combined Forms 1098
totaling $20,000 or more of mortgage interest that were filed with the IRS for
Tax Year 2005. For the first sample, TIGTA
matched the taxpayer identification numbers on Forms 1098 meeting our criteria
to accounts in the IRS Individual Return Transaction File and found 219,593
individuals without a corresponding tax return.
From the 219,593 potential nonfilers, TIGTA randomly selected 100 for
review and identified 21 individuals who appeared to have a filing requirement
for Tax Year 2005, but had yet to be contacted by the IRS. TIGTA estimated that the 21 individuals may
owe as much as $177,715 in delinquent taxes and $107,209 in penalties and
interest. When projected to our
population of 219,593 potential nonfilers, our results indicate that 46,115
potential nonfilers may collectively owe $625 million in delinquent taxes,
penalties, and interest for Tax Year 2005.
In the second
sample, TIGTA matched the taxpayer identification numbers on Forms 1098 meeting
our criteria to the accounts in the IRS Individual Return Transaction File and
identified 245,535 individuals who reported less adjusted gross income on their
Tax Year 2005 returns than the amount of mortgage interest reflected on their
Forms 1098. After randomly selecting 100
of the 245,535 individual returns for review, TIGTA used the IRS’ cash
transaction analysis process and identified 37 individuals who may have
underreported their income because their mortgage interest and basic living
expenses appear to exceed their income.
Overall, based on our sample results, TIGTA estimated that these 37
individuals may owe $265,018 in additional taxes and $61,233 in penalties and
interest. When projected to our
population of 245,535 filers, our results indicate that 90,848 taxpayers may
owe $801 million in additional taxes, penalties, and interest for Tax Year 2005.
WHAT TIGTA RECOMMENDED
TIGTA
recommended that the Director, Examination, Small Business/Self-Employed
Division, explore the feasibility of making greater use of mortgage interest
data to pursue additional nonfilers and underreporters for audit.
READ THE
FULL REPORT
To view the report,
including the scope, methodology, and full IRS response, go to:
http://www.treas.gov/tigta/auditreports/2009reports/200940112fr.html.
Email Address: inquiries@tigta.treas.gov
Phone Number: 202-622-6500
Web Site: http://www.tigta.gov