How would you handle this?

[Questionguy101]

Two years ago, a client took a equity loan from his primary residence and used the proceeds to buy a rental property.

Based on the trace rule, I deducted the interest of the equity loan in the Schedule E of the rental property in the last two years.

Is there any problem with it?

Now, the client is doing a refinance. The bank is questioning why the interest is not deducted in Schedule A since the loan is taken out from the primary residence. Obviously, they do not know much about the trace rule.

Now they want me to give them a written explanation of it. Am I obliged to do it? If you were me, would you give them the written explanation?

This is the first time I come across this situation and I think I need advice as to how to handle it. Thanks.

[jimmcg]

Two years ago, a client took a equity loan from his primary residence and used the proceeds to buy a rental property.

Based on the trace rule, I deducted the interest of the equity loan in the Schedule E of the rental property in the last two years.

Is there any problem with it?

Now, the client is doing a refinance. The bank is questioning why the interest is not deducted in Schedule A since the loan is taken out from the primary residence. Obviously, they do not know much about the trace rule.

Now they want me to give them a written explanation of it. Am I obliged to do it? If you were me, would you give them the written explanation?

This is the first time I come across this situation and I want need advice as to how to handle it. Thanks.

You are dealing with some ignorant bank clerk. You need to move higher up the food chain and talk to their supervisor who should be aware of the tracing rules or can consult the bank tax advisor. You should put nothing in writing to the bank. Their employee ignorance is their problem. Simply tell them the return was prepared properly and in accordance with the code requirements.

[S T]

Agree

I have never had a Bank question deduction of interest on Schedule A or Schedule E or Schedule C, seems like the only privileged personnel to ask that question would be IRS - Auditors.
It is a known fact that most bank personnel and loan underwriters DO NOT know how to read a Tax Form. At least I have found "few" in my career of preparing taxes.

No stmt - other than maybe tax returns were preapred correctly according to the IRS guildelines and Regs - and I doubt that I would do that. and then you could refer them to Pub 936

Sandy

[WhiteOleander]

Sometimes the banks, etc try to get the preparer to write letters authenticating the numbers on a return. This might be a way to get the letter through another way.

I wouldn't write a letter. I'd tell them to read up on interest tracing rules at IRS.gov.

[Questionguy101]

Sometimes the banks, etc try to get the preparer to write letters authenticating the numbers on a return. This might be a way to get the letter through another way.

I wouldn't write a letter. I'd tell them to read up on interest tracing rules at IRS.gov.

Do you have the link to the interest tracing rules?

[S T]

Try the Pub

Lead them to look at Pub 936, and
then for you look at TTB Chapter 4 and probably starting around 4-14, that should provide you with the information.

Sandy

[taxea]

Two years ago, a client took a equity loan from his primary residence and used the proceeds to buy a rental property.

Based on the trace rule, I deducted the interest of the equity loan in the Schedule E of the rental property in the last two years.

Is there any problem with it?

Now, the client is doing a refinance. The bank is questioning why the interest is not deducted in Schedule A since the loan is taken out from the primary residence. Obviously, they do not know much about the trace rule.

Now they want me to give them a written explanation of it. Am I obliged to do it? If you were me, would you give them the written explanation?

This is the first time I come across this situation and I think I need advice as to how to handle it. Thanks.

The banks don't know anything about preparing taxes much less the trace rule...I would simply say it is on the Sch E and the Sch A.
If they demand the tax returns then it is their responsibility to know how to read them. I would ask if they will pay me for my time to explain it to them.

[ChEAr$]

Also it's the client who should be dealing with the bank, furnishing them the information, perhaps written up (at a small fee of course) by the preparer.

Any direct dealings with bank by preparer should be permitted with a signed statement.

I'm sure we all know that, but just restating the obvious.

[Nashville]

Absolutely

Do a double take on ChEAr$ advice.

Both the bank and the client are putting the onus on YOU to give them the warm and fuzzy that they want. You have absolutely no responsibility to the bank, and in fact you are violating confidentiality without a release.

In particular, banks are the parties insistent upon a copy of the tax return. If they can't read it, then why do they want it?

Do all your explaining to your client, and then if he can't relay the message and wants YOU to be his front man (lady), obtain a fee for this up front.

[Nashville]

Privacy Regulations

Ever since the new privacy regulations took effect in 2008 there have been a few dramatic changes.

Clients who never bothered to save a copy of their tax return are now having to jump through extra hoops to get one. In particular, their usual "Hey, can you fax this to the bank real quick?" has turned into, "Yes, but not to the bank. I can fax or mail it to YOU, and then you can share it with whomever you wish."

What used to be Instant-Pressure-To-Drop-What-Im-Doing-And-Rush-Some-Document-To-Someone has turned into "For $10 I will print off another copy of your tax return and send it to YOU." This now means a turnaround time of a few days instead of "Do this for me or else I will drop dead right here on the spot."

It used to be the same clients year-after-year for some reason. Buying a house every 2-3 years, consolidation loans with home equity, or a copy for the SBA loan people, etc. The changes are starting to work.