Tax Administration:

Expanded Reporting on Seller-Financed Mortgages Can Spur Tax Compliance

GGD-91-38: Published: Mar 29, 1991. Publicly Released: May 6, 1991.

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Pursuant to a congressional request to assist the Internal Revenue Service (IRS) in increasing taxpayer compliance, GAO reviewed buyers' and sellers' reporting of interest payments made or received under seller-financed mortgages (SFM).

GAO found that, according to an IRS study: (1) some taxpayers failed to correctly report SFM interest paid or received; (2) in one service area, IRS enforcement efforts were severely hampered because it could not locate 978 of the 1,495 corresponding seller returns, mainly because of illegible, incomplete, or missing sellers' names and addresses cited on SFM buyers' tax returns; and (3) the number of SFM would increase and, unless action was taken, noncompliance would continue. GAO also found that: (1) Social Security Number (SSN) reporting has helped improve voluntary compliance in such areas as dependent exemptions, alimony payment deductions, and child care tax credits; and (2) total SFM interest payments exceeded other payments for which SSN reporting is already required. GAO believes that SSN reporting requirements for SFM could generate improved compliance and additional tax revenues.

Matters for Congressional Consideration

  1. Status: Closed - Implemented

    Comments: P.L. 102-486, signed October 1992, included provisions for SFM reporting as recommended.

    Matter: Congress should enact legislation to require buyers who deduct SFM interest to report on their tax returns the name and SSN of the seller.

  2. Status: Closed - Implemented

    Comments: P.L. 102-486 provisions for SFM reporting included penalty provisions as recommended.

    Matter: Congress should enact legislation to authorize IRS to penalize: (1) buyers who fail to provide the sellers' SSN and cannot show that they made reasonable efforts to obtain it; and (2) sellers who refuse to provide SSN to buyers.

Recommendation for Executive Action

  1. Status: Closed - Implemented

    Comments: Tax returns for 1992, filed in 1993, were the first with SFM information. IRS is using SFM data from these returns in any audits of the mortgage interest deduction. IRS has no plans to do any formal computer matching because the costs would be too high for the level of noncompliance. IRS may reconsider doing matching after TSM comes on board. TSM will cut these costs a lot.

    Recommendation: If Congress enacts legislation to require buyers to report sellers' SSN, the Commissioner of Internal Revenue should use the sellers' and buyers' SSN to study the extent of taxpayer noncompliance and, on the basis of the study's results, implement an enforcement program, such as computer matching, to pursue cases of potential noncompliance.

    Agency Affected: Department of the Treasury: Internal Revenue Service

 

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