Background: Form 1098, the Mortgage Interest Statement, is used to report to borrowers and the IRS any mortgage interest paid on home and other real property mortgages. This reporting is required of payment recipients (i.e., lenders) who receive mortgage interest payments of $600 or more during the year in the course of their trades or businesses. The form doesn’t need to be filed for interest received from a corporation, partnership, trust, estate or association.
Tax professionals that missed the IRS changes routinely enter into their tax return preparation program the entire amount reported on their clients’ 1098 forms as fully deductible home mortgage interest, oblivious to or intentionally ignoring the fact that not all of the interest reported on the form may be deductible due to the acquisition and equity debt limitations. For the most part, these individuals have gotten away with this bad practice for years, but probably no longer. The IRS is well aware of this gap in their compliance efforts and has redesigned the 1098 for 2016 to provide additional information that will allow the IRS computer to ferret out those returns suspected of overstated home mortgage interest.
The IRS has not divulged their plans, but it is pretty safe to say we will see a significant uptick in the number of clients receiving CP-2000 series notices in 2017 questioning their home mortgage interest deductions. Preparers who continue to ignore the home mortgage interest limitations may be in for some embarrassing phone calls from clients and potentially risk losing clients.
The IRS will also be snaring those who self-prepare their tax returns, which can lead to new clients and additional business for those professional tax preparers who are proficient in home mortgage interest deductions.
Effective for the 2016 tax year (1098s issued after 2016), in addition to the amount of interest and points for the year, the lender will have to include additional information (see 2016 form below).
Box 2: – Outstanding Mortgage Principal as of 1/1/2016
Box 3: – Mortgage origination date
Box 5: – Mortgage Insurance Premiums
Boxes 7, 8, and 9: – Address information of property securing the mortgage.
This extra information will provide practitioners AND the IRS with additional tools to determine whether the loan is acquisition or equity debt, whether the loan balance exceeds the statutory home acquisition or equity debt limits, and whether the amount of interest deductible as home mortgage interest has been (or needs to be) limited. It will also help them figure out whether the 1098 is associated with the home of the taxpayer.