Improving Real Estate Tax Compliance

Individual taxpayers who itemize federal income-tax deductions and whose local real-estate tax bills include nondeductible charges face challenges determining what real-estate taxes they can deduct on their federal income tax returns. Neither local-government tax bills nor mortgage-servicer documents identify what taxpayers can properly deduct. Without such information, determining deductibility can be complex and involve significant effort. GAO made several recommendations for the Commissioner of Internal Revenue to improve real estate tax deduction compliance. The recommendations include:

• enhancing IRS's guidance to taxpayers by placing a stronger disclaimer early in the guidance to alert taxpayers to check whether all charges on their real-estate tax bill are deductible and clarify that real-estate tax bills may be insufficient evidence of deductibility when bills include nondeductible charges that are not clearly stated.
• conducting outreach activities with local governments and mortgage servicers to explore options for clarifying charges on the local tax bills or adding disclaimers to these bills that some charges may not be deductible, and with tax-preparation software firms and other tax preparers to ensure that they are alerting taxpayers that some local charges are not deductible and that they are aware of enhancements to IRS's guidance.
• improving guidance to its examiners auditing the real-estate tax deduction by indicating that evidence of deductibility should not rely solely on mortgage escrow statements, Forms 1098, and canceled checks, and may require examiners to ask taxpayers to substantiate the deductibility whenever they have reason to believe that taxpayers have claimed nondeductible charges that are large, unusual, or questionable.
• identifying a cost-effective means of obtaining information about charges that appear on real-estate tax bills in order to identify and outreach to local governments with potentially large nondeductible charges on their bills to help them inform affected taxpayers of nondeductible charges.

IRS agreed with the majority of our recommendations.

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Real Estate Tax Deduction: Taxpayers Face Challenges in Determining What Qualifies; Better Information Could Improve Compliance

GAO-09-521, May 13, 2009

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