The Internal Revenue Service should check Form 1098 mortgage interest statements to catch tax dodgers, recommended a new report.

The report, from the Treasury Inspector General for Tax Administration, said the information could help the IRS identify individuals who are either not filing their taxes or underreporting their income on their tax returns. TIGTA auditors found that large numbers of people are paying a significant amount of mortgage interest and are either not filing their tax returns or filing returns indicating that their income is not sufficient to cover their mortgage obligations and basic living expenses. The report recommended that the IRS explore the possibility of making greater use of data from mortgage interest statements to pursue tax evaders.

TIGTA used data from 2005 to produce a random sample of 100 potential nonfilers, and found that 21 of them may collectively owe up to $177,715 in delinquent taxes and $107,209 in penalties and interest. A similar random sample of 100 individuals who filed returns showing income insufficient to cover their mortgage and expenses indicated that 37 individuals might collectively owe $265,018 in additional taxes and $61,233 in penalties and interest.

“Information reporting is a key component in IRS compliance programs that are designed to detect and pursue noncompliant taxpayers who underreport income, overstate deductions or fail to file tax returns,” said TIGTA Inspector General J. Russell George in a statement. “Individuals who fail to file required returns and/or underreport their income create unfair burdens on honest taxpayers and diminish the public’s respect for the tax system.”

The IRS agreed with TIGTA’s recommendations and plans to take action. “We concur with your recommendation and agree that we should explore the feasibility of making greater use of mortgage interest data to pursue additional nonfilers and underreporters for audit,” wrote Christopher Wagner, commissioner of the IRS’s Small Business/Self-Employed Division, in a letter to TIGTA.

In addition to the TIGTA report, the Government Accountability Office also issued a report Monday recommending that the IRS closely watch mortgage interest deductions.

"Several options exist for expanding information reporting on taxpayers’ mortgages and using private sector data to enhance compliance," said the report. "Useful information would include property addresses, debt balances, and an indicator of loan refinancing. This information would allow [the] IRS to identify taxpayers reporting mortgage interest exceeding the acquisition debt limit. Third parties who send information reports to [the] 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 [the] IRS detect home equity noncompliance."

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