The Internal Revenue Service (IRS) already monitors mortgage-interest payment information to identify people who likely should have filed a tax return, but failed to do so. In the future, this data provided by banks will also help identify taxpayers who may be underreporting their income.
The IRS program could lead to audits for those who don’t file tax returns at all, or who report less income than was paid in mortgage interest, according to a recent announcement by the U.S. Department of Treasury.
Experts point out potential problems with the plan. It doesn’t account for unemployed individuals who use cash savings or credit cards to continue making mortgage payments, even while their income source is gone. On paper, these individuals could be categorized as tax evaders, whereas reality paints a starkly different picture.
“We shouldn’t presume that these struggling families are tax cheats just because they continue to make their mortgage payments despite losing their income,” Rep. Charles Boustany (R-La.) told the Wall Street Journal. (1)
The Treasury, however, says that there could be as much as $1.4 billion in unreported or underreported income taxes, penalties and interest. At the very least, there are enough non-filers who paid over $20,000 in mortgage interest to cause concern. Federal officials are especially mindful of the new plan as a best effort to monitor any small business owners who operate primarily with cash, as is often the case in the construction industry. The IRS program expansion is expected to take effect by 2011.
footnote: 1. Vaughan, Martin. “IRS to mine payment data on mortgages.” Sept. 1, 2009.
