Report: Use Mortgage Data to Catch Tax Cheats

WASHINGTON -- U.S. tax authorities may be forgoing $1.4 billion of revenue annually because they fail to thoroughly compare mortgage interest statements submitted by banks against individual tax returns, according to a government report released Monday.

The Internal Revenue Service uses mortgage interest statements, known as 1098 Forms, to catch tax cheats. But a review of 200 samples for 2005 estimated that the agency may be missing tens of thousands of taxpayers who are not reporting or underreporting their income, the Treasury inspector general for tax administration said in a report.

"A large number of individuals are paying a significant amount of mortgage interest and either are not filing tax returns or are filing tax returns indicating their income is not sufficient to cover their mortgage obligations and basic living expenses," said the report, dated Aug. 6.

"The considerable difference between expenditures and income raises very serious questions about whether these taxpayers have additional sources of income that should have been reported on their tax returns," it continued.

The IRS, in a response included in the report, said it agreed with the recommendation that it make greater use of mortgage interest data to track tax evaders. The report did find that the IRS collected $276 million from delinquent taxpayers based on mortgage data from 2005 returns.

The office of the inspector general looked at two samples of 100 taxpayers with $20,000 or more of mortgage interest. Using a statistical sample to extrapolate to the broader population, it estimated that about 137,000 taxpayers may be not reporting or may be underreporting their income.