The Inspector General for Tax Administration recently completed a study that revealed 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 reporting income that is not sufficient to cover their mortgage obligations and basic living expenses.  The considerable difference between income and expenditures on these returns raises serious questions about whether additional income should have been reported. 

The study evaluated two statistically valid samples of 100 individuals with $20,000 or more of mortgage interest reported by lenders in 2005. 

In the first sample, the study found 219,593 individuals with $20,000 or more of mortgage interest without a corresponding tax return.  Out of those individuals, 100 were randomly selected for review and from that group, 21 individuals appeared to have a liability of as much as $284,924 in taxes and penalties.  Comparing those results to the entire 219,593 individuals identified, the study estimated that there were 46,115 non-filers who collectively may owe $625 million in delinquent taxes, penalties and interest for TY 2005.

In the second sample, the study matched the taxpayer identification numbers on the Mortgage Interest reported by the lenders (Forms 1098) to the accounts in the IRS Individual Return Transaction File and identified 245,535 individuals who reported less adjusted gross income on the returns they filed for TY 2005 than the amount of mortgage interest reflected on their Forms 1098.  After randomly selecting 100 of the 245,535 individual returns for review, the study identified 37 individuals who may have underreported their income because their mortgage interest and basic living expenses appear to exceed their income and may owe $326,251 in additional taxes, penalties and interest.  That project totals $801 million in additional taxes, penalties and interest for TY 2005 for the entire sample.