IRS May Mine Mortgage Data To Flush Out Tax Cheats

WASHINGTON -(Dow Jones)- The Internal Revenue Service might scrutinize mortgage interest data more closely to help catch tax cheats, after prompting from an IRS auditor.

The tax collector said it will study whether it should make greater use of mortgage interest data provided to the IRS by banks, to target audits against individuals who do not file tax returns, according to a letter released Monday by the Treasury Inspector General for Tax Administration.

However, a stepped-up IRS focus on homeowners whose reported income falls below their mortgage interest obligations could attract criticism at a time when many have fallen behind on mortgage payments.

TIGTA said in a Monday report that tens of thousands of homeowners who paid more than $20,000 in mortgage interest in 2005 either did not file a tax return or reported income that appears insufficient to cover their mortgage interest and basic living expenses.

Based on a sample of these returns, non-filers and potential under-reporters identified by TIGTA could have owed a combined total of $1.4 billion in tax, penalties in interest, the auditor said.

Banks report data on mortgage interest paid by individuals to the IRS and to the homeowner, using IRS Form 1098.

Through an existing program, the IRS already sends notices to non-filers that it believes, based on income and mortgage interest data, should have filed a tax return. Through that program, the IRS has assessed an additional $276 million in taxes for tax year 2005.

But TIGTA said the IRS should boost scrutiny of mortgage interest data in selecting cases for individual audits.

The IRS said it will expand a regional research project, known as a Compliance Initiative Project, on mortgage interest to a nationwide level by December 2011.

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