If you’re like millions of homeowners, you recently received a familiar, 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 by law to fill it out and send it to the IRS.
But there are key differences in this year’s form that are easy to miss yet potentially important to you — and could trigger an audit by the IRS. Under an obscure statutory change buried in a federal highway bill that passed Congress in the summer of 2015, your lender must now disclose more information to the IRS about your loan, including the amount of the outstanding principal balance at the beginning of the year, the origination date of your mortgage and the address of the home securing the loan.
What’s up with these changes? Though the IRS had no immediate comment when I asked whether it is ratcheting up its scrutiny of home mortgage interest deductions, that appears to be the case. As one of the largest write-off in the tax code — with a projected $357 billion revenue cost between fiscal years 2016 and 2020 — the mortgage deduction is a fat target. Plus the rules governing eligibility for taking deductions are complex, and government watchdog agencies have been critical of the IRS’s oversight of this area in years past.
The lack of crucial datapoints in the previous version of the 1098 form made it challenging for the IRS to determine whether some properties qualified for interest deductions, or whether the claimed amounts were in sync with reported incomes or based on mortgage amounts that exceeded the tax code’s limits of $1 million in “home acquisition debt” and $100,000 of “home equity debt.”
