MORTGAGE INTEREST - Must tell ?

[TAXNJ]

Scenario:

Mortgage company sends form 1099 to IRS to report mortgage interest paid say $9k.

Taxpayer does not have to file tax return based on income - say basic social security benefits and sale of principal residence (no reportable gain).

IRS sends letter to taxpayer to explain information of source of money to make the mortgage payments if not required to file a tax return.

Anyone experience this ?

[DonPriebe]

Scenario: ...

Taxpayer does not have to file tax return based on income - say basic social security benefits and sale of principal residence (no reportable gain). ...

Per Pub 17, Gross income for filing requirement includes income from sale of principal residence even if no taxable gain.

Gross income means all income you received in the form of money, goods, property, and services that is not exempt from tax, including any income from sources outside the United States or from the sale of your main home (even if you can exclude part or all of it).

[Edsel]

Why the letter?

NJTAX, I'm a little bit curious about the IRS letter.

First let me see if I understand correctly -- IRS instead of matching 1099s for unreported income, is now writing a letter based on a 1098?

Trying to connect the dots on this one - are they assuming a 1098 for $9000 means that a citizen is now dealing with debt service (of at least this amount or even more). How can they afford to pay this kind of mortgage if their income level is so low they don't have to file a return? Is this what is happening with this letter?

Readers, take note. If I have read NJTAX correctly, then IRS has expanded its computer-intercept audit program from unmatched 1099s to unreported 1098s. Also, there is a lot more of this going on with older Americans than ever before -- as increasing hordes of successive generations will borrow money to spend for decades into retirement age and leave their house unpaid for.

[taxmom34]

I would think IRS also received a 1099B for the sale of house and they are not assuming it is excludable

[Burke]

First let me see if I understand correctly -- IRS instead of matching 1099s for unreported income, is now writing a letter based on a 1098?

Trying to connect the dots on this one - are they assuming a 1098 for $9000 means that a citizen is now dealing with debt service (of at least this amount or even more). How can they afford to pay this kind of mortgage if their income level is so low they don't have to file a return? Is this what is happening with this letter?

Yes, that is exactly right. I read about this program almost a year ago, but cannot remember exactly what source it was from. If they can explain the source of the funds, then ok. Otherwise IRS suspects under-reporting of taxable income on this non-filer. IRS may or may not have the info on sale of home. If the sale price was under $250K/$500K MFJ, and TP signed the proper documents at closing, then no reporting required by closing agent. Also, if they do have a 1099B on the sale of the home, they don't know if it meets the principal residence rules for exclusion. It might be a second home, vacation property, rental property, etc.

[Gary2]

IRS sends letter to taxpayer to explain information of source of money to make the mortgage payments if not required to file a tax return.

Just a side note on the wonderful ambiguity of the English language. My first take on this was "The IRS sent a letter to the taxpayer. The letter explains to the taxpayer that there are sources of money that the taxpayer could tap into, in order to make payments on their mortgage if their income had fallen below some numbers."

Obviously you don't want to be as long-winded as that, but "sent a letter asking the taxpayer to explain ..." would solve the ambiguity.

(I don't mean to pick on anyone, since nobody writes perfectly all the time. I'm just pointing out one way ambiguities can easily sneak in. I'll also concede that I personally find very terse writing more difficult to read, but that seems to be the direction English is heading.)

[Gary2]

Yes, that is exactly right. I read about this program almost a year ago, but cannot remember exactly what source it was.

I don't know about this specifically, but I think it was about two years ago when I first started seeing CP2000s for 1098 mismatches, typically when a co-owner reported interest on line 10, when it should have been on line 11 if the 1098 was in the other co-owner's SSN. I'm guessing that's when the IRS added the 1098 data to the Automated Under-Reporter program, and that they continue to enhance it.

Or it could just be the luck of the draw that I didn't see those letters during my first couple of years looking at CP2000s.

[Burke]

You may be right on the time frame. But whatever I read actually stated they were going to question 1098 info where it exceeded income reported, more or less. Some of it may be due to the overseas account problem too.

[Gary2]

You may be right on the time frame. But whatever I read actually stated they were going to question 1098 info where it exceeded income reported, more or less. Some of it may be due to the overseas account problem too.

I'm sure you're right, too. I think it's a fair assumption that the IRS considers the AUR program in general a success, and that each year they try to enhance it with more smarts. Sometimes they trip over themselves, and they go overboard on an issue, but they'll keep refining it to avoid too many unnecessary letters.

[Y2KEA]

California has been doing this same type of fishing expedition/extortion for a couple of years, that I have seen.

I had a client bring me a notice. His only income is social security & he is living off his savings.

The notice said (making up numbers) you paid $15,000 in mortgage interest. That tells us you have $60,000 in income you did not report. You owe us $10,000.

The FTB does this based soley on the 1098. The client had no income reported to him which FTB could use to determine his income.

You can't make this stuff up folks!

[TAXNJ]

Yes they probably would

I would think IRS also received a 1099B for the sale of house and they are not assuming it is excludable

So, a tax return must be filed for sale of main residence (though gain exclusion applies - no schedule D), to show social security benefits and interest income of less than $50.

as Don above quoted Pub 17 "Gross income means all income you received in the form of money, goods, property, and services that is not exempt from tax, including any income from sources outside the United States or from the sale of your main home (even if you can exclude part or all of it).

[TAXNJ]

thank you

yes, they would like to know the "sources" of money to pay the interest, if from "spouse", "other family members", loan, etc.

You are right - not long winded. Bottom line, if do not have to file a return, they want a letter to provide the info

[joanmcq]

The CA program goes after people with biz licenses that don't file, as well as a lot of things.

They are looking for unreported income, and I've had several of these where the taxpayer who was 1st on the mortgage was being supported by the person who was second on the mortgage. It's actually quite easy to clear up.

Proving you don't have any income when you have a biz license is a lot harder. Sometimes it's better to file a return even if you don't have to (under the income threshold) just to keep this kind of stuff from happening.

[TAXNJ]

You are right

yes, that should help

Thanks for your comment

[WhiteOleander]

yes, they would like to know the "sources" of money to pay the interest, if from "spouse", "other family members", loan, etc.

You are right - not long winded. Bottom line, if do not have to file a return, they want a letter to provide the info

Not sure about this. Is there a IRC that allows this? Just curious. What if you file a return and the IRS still says the income doesn't support the outgo? Maybe you have very good friends who give you money (of course, I don't have any friends like that) as well as family or a signifigant other that paid for alot of your living expenses. That income would not be taxable to you. Is there an IRC that says you have to divulge it?

Can the taxpayer refuse to give the info? I know they could be chosen for an audit. But, is there a Code to back them up?

Believe me, I'm not a tax protester, I just wonder if the IRS is making up a right to do this.