Taxation & Estate Planning

Non-filers with mortgages: The IRS might be watching

By howardlevy

I received a call from a Wall Street Journal reporter on a story he was writing on an IRS announcement that they might use mortgage interest payments to identify non-filers.

It goes like this:  You have not filed tax returns.  You are self-employed and your income is not reported to the IRS.  But you own a home, and pay mortgage interest.  Your bank, as it is required to do, reports to the IRS the amount of mortgage interest you paid.  The theory is that if you are paying your mortgage, there is a substantial likelihood you have income. But if the IRS has no record of a tax return being filed, the conclusion is that there is unreported income and missing tax filings.

As I stated to the reporter (and was quoted in the article), this is clearly the IRS attacking the cash economy – those who are self-employed and for any number of life reasons – divorce, medical problems, business failures – and have not filed tax returns.

This will not always be black and white.  Mortgage interest could be paid by non-taxable sources – like refinancing a house, taking cash out and living off the funds during periods of unemployment.  But, as the study indicated, there are those who do pay mortgages, have income, and have not filed their taxes.

The best way to handle unfiled returns is voluntarily before the IRS comes calling. Although non-filing is an indicator of criminal tax fraud, in most cases the IRS simply wants tax returns and an approach to the unpaid taxes, like offer in compromise, repayment agreement, uncollectible or bankruptcy. These are civil issues only.

Non-filing can be stressful enough – getting a head start on the IRS is the best way to formulate a plan to prepare the returns and find solutions to nonpayment.

Full post as published by IRS and the Law on September 02, 2009 (boomark / email).