New 1098s could trigger more IRS audits of homeowners

If you’re like millions of homeowners, you recently received an innocuous-looking document from your lender. It’s called Form 1098 and it totes up how much interest you paid on your mortgage last year. Your lender is required to fill it out and send it to the IRS.

But there are key differences in this year’s form. Your lender must now disclose more information, including the outstanding principal balance at the start of the year and the mortgage’s origination date.

It seems the IRS is ratcheting up its scrutiny of mortgage interest deductions, one of the largest write-offs in the tax code. It will cost the government a projected $357 billion for fiscal years 2016 to 2020.

Watchdogs have been critical of the IRS’s oversight of this area.

The lack of crucial data points in the previous 1098 form made it challenging for the IRS to determine whether properties qualified for interest deductions, or whether the claimed amounts were in sync with reported incomes or the tax code’s limits of $1 million in “home acquisition debt” and $100,000 of “home equity debt.”

Charles Benway, an accountant with Main Street Financial in Mt. Kisco, New York, said many owners don’t know that when they pay down their original mortgage, their acquisition debt declines. If they later refinance into a larger loan and use the proceeds for purposes other than buying, building or improving their home (or second home), a portion of the interest they pay may not be deductible.

It’s complicated, Benway says, and “it’s going to hit people” once the IRS begins feeding this year’s 1098 data into its computers.

Bottom line: Just because your 1098 says you paid a certain amount of interest doesn’t automatically mean that’s what you can deduct.