MORTGAGE INTEREST - Must tell ?

[Jiggers]

The IRS has been doing this for years. About 25 years ago, a taxpayer came to me with a letter from the IRS questioning the $11,000 cash that the bank reported as giving him.

He cashed a check and didn't report it.

The check was from an insurance company paid because of the death of his son.

He didn't have a bank account and his only income was SS.

I got a POA, called the IRS, explained the situation. They appologized, and closed the case.

[Jiggers]

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.

Local property tax appraisal district received a list of taxpayers that had sales tax permits. They merged that list with the businesses on the tax roll and sent appraisal notices to all the others. Requesting information on the business and assets owned so that they could assess property taxes! You would be surprised at all the home businesses that contacted me about the letter that wasn't reporting income on their tax returns. Some of these were my clients and I had no clue they were doing these home businesses.

They all decided to go out of busines 12/31 of the prior year!

[New York Enrolled Agent]

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

The Tax Court frequently intones the following: "Taxpayers who rely on IRS publications do so at their own peril".

§61(a)(3) clearly says gross income includes gains from dealings in property.

§121(a) says
(a) Exclusion.
Gross income shall not include gain from the sale or exchange of property if, during the 5-year period ending on the date of the sale or exchange, such property has been owned and used by the taxpayer as the taxpayer's principal residence for periods aggregating 2 years or more.

Subsection (b) gives the limitations of 250/500K. I think the entry in Pub 17 is not quite correct.

For White Oleander - §7602 gives vast authority to the IRS to ask questions regarding the correctness ... " making a return when none has been made". Very powerful Code section.

[WhiteOleander]

For White Oleander - §7602 gives vast authority to the IRS to ask questions regarding the correctness ... " making a return when none has been made". Very powerful Code section.

Thank you very much. I'm going to read that code. I anticipate some of those types of letters coming into our office. I'd like to be sure how to advise them.

[DonPriebe]

...

§61(a)(3) clearly says gross income includes gains from dealings in property.

§121(a) says
(a) Exclusion.
Gross income shall not include gain from the sale or exchange of property if, during the 5-year period ending on the date of the sale or exchange, such property has been owned and used by the taxpayer as the taxpayer's principal residence for periods aggregating 2 years or more.

Thank you for the correction.

[taxea]

I think it may be a matter of "garbage in/garbage out" on the part of whomever wrote the IRS comparison program. The computer has a 1098 showing 9K and no tax return showing 9K deducted on the Sch A.
The letter is computer generated so the IRS really doesn't know it went out until the TP responds to it or has received three notices at 60 day intervals. No human IRS eye ever sees any of this unless and until the TP sends a response.

[DaveO]

I only have a few CA clients but one of them got a notice just like Y2KEA described. Same situation, elderly TP living off a pension and savings with a mortgage.

[Burke]

. No human IRS eye ever sees any of this unless and until the TP sends a response.

And sometimes not even then. Just wrote Letter #2, because they totally ignored Letter #1. They did take client's money however, and applied it. Just came back asking for more, because they didn't read letter or make proper adjustments to return as instructed.

[S T]

Calif Client

Yes I had a Calif client that received a Calif Notice mortgage interest paid reported, and no tax return (retired) No notice from IRS

Calif MADE me file a tax return, good for me for fee but of course the client was upset.

He had SSA retirement, and little other income, none of which was taxable to Calif.

Calif is on their usual "fishing expedition" the last couple of years. "Penny wise and Pound Foolish"

Sandy

[TAXNJ]

Driving force why to file - 1099-S

Both DON PRIEBE & NY ENROLLED AGENT are right. But watch out for form 1099-S.

Yes, Pub 17 & 523 are very informative but driving force why to file may be - 1099-S if issued (see instructions).

Note: maybe the taxpayer would not have received that letter from the IRS had it not been for the 1099-S being issued. But if at closing, if the taxpayer "attests" to meeting the ownership and use test, no 1099-S is required to be filed, then maybe no requirement to report the sale.

If issued - file return to show Personal Residence Home Sale and applicable Section 121 exclusion

[Gary2]

Calif is on their usual "fishing expedition" the last couple of years. "Penny wise and Pound Foolish"

While there's always room for improvement in their software heuristics, I wouldn't assume that it's pound foolish. If it costs them $50 to process each letter, (including the cost of handling the phone calls that result), and 5 out of ever 100 letters produces $1000 in revenue, they've covered their costs. My guess is that their hit ratio is better than 5%.

Of course, this ignores the political costs associated with 95 annoyed voting families.

[taxea]

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

this is all done by computer comparison...computers do not think they merely follow instructions programmed into them. If they have a 1099 for sale...nothing tells them to check to see whether there is a 1098 has anything to do with the 1099.

If the computer has a 1099 for a given ssn it checks to see whether the 1099 was reported on a tax return. If it has a 1098 it checks the ssn Sch A mortgage interest line for a like amount. When it can't pair up either it generates a letter. No reasoning or thought involved.

[Gary2]

If the computer has a 1099 for a given ssn it checks to see whether the 1099 was reported on a tax return. If it has a 1098 it checks the ssn Sch A mortgage interest line for a like amount. When it can't pair up either it generates a letter. No reasoning or thought involved.

For the 1098, it's the other way around. If it sees a Sch. A line 10 item, it looks for a matching 1098. If it can't find one, it generates the letter. If it started with the 1098, then all the people who can't itemize would be getting letters.

It's not totally mindless. If it sees a 1099-INT for $500, and no other records for an individual, or say just the interest plus an ordinary SSA-1099 (a fairly common situation), it will ignore it as being below the filing threshold.

Or maybe it's cursory manual review. At the Atlanta IRS forums, I got the impression that each CP2000 had to be reviewed by an agent before being mailed. I neglected to ask for clarification, but if my impression is correct, it's possible that the manual review is only looking for terribly obvious things, like the filing requirement.