Tax Administration:

Overstated Real Estate Tax Deductions Need To Be Reduced

GGD-93-43, Jan 19, 1993

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Pursuant to a congressional request, GAO reviewed federal real estate tax deductions in Montgomery County, Maryland, and New Jersey and Minnesota, focusing on the: (1) extent to which taxpayers overstated their federal real estate tax deductions and related tax losses; and (2) reasons for overstated deductions.

GAO found that: (1) taxpayers overstated their real estate tax deductions by about $1.5 billion nationwide; (2) the 1992 federal income tax loss was estimated at $400 million; (3) an estimated 91 percent of Montgomery County taxpayers erroneously deducted $21.6 million in user fees, which resulted in a tax loss of $7.6 million; (4) New Jersey and Minnesota taxpayers failed to properly report $105 million in cash rebates which resulted in a $25 million loss of federal revenue; (5) reasons for noncompliance included inadequate deduction and reporting instructions, the use of escrow accounts to support tax deductions, the opportunity for unrecognized fraud, the timing of mailed cash rebates, and confusing real estate tax bills that failed to distinguish between taxes and user fees; and (6) 49 other large local governments had tax bills that failed to clearly distinguish between taxes and user fees.

Status Legend:

More Info
  • Review Pending-GAO has not yet assessed implementation status.
  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
  • Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.
  • Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.
    • Review Pending
    • Open
    • Closed - implemented
    • Closed - not implemented

    Recommendations for Executive Action

    Recommendation: The Commissioner of Internal Revenue should notify examiners to check local records on user fees and state records on rebates to verify real estate tax deductions.

    Agency Affected: Department of the Treasury: Internal Revenue Service

    Status: Closed - Implemented

    Comments: IRS has notified examiners but IRS noted that IRS examiners have many other checks to make.

    Recommendation: The Commissioner of Internal Revenue should work cooperatively with local governments to revise their real estate tax bills in order to identify user fees and special assessments, label these charges as not tax deductible, and notify taxpayers that the local government may report the deductible tax to IRS.

    Agency Affected: Department of the Treasury: Internal Revenue Service

    Status: Closed - Not Implemented

    Comments: IRS held discussions with local governments about changing the bills. However, due to resistance from many of these governments, IRS will not actively pursue this recommendation. IRS does not foresee any federal funding becoming available for this change.

    Recommendation: The Commissioner of Internal Revenue should include rules on the tax deductibility of user fees, special assessments, and rebates in the Form 1040 instructions and consider ways, such as an optional worksheet, to help taxpayers calculate the real estate tax deduction.

    Agency Affected: Department of the Treasury: Internal Revenue Service

    Status: Closed - Implemented

    Comments: IRS has expanded the discussion of real estate taxes in several publications. IRS has not created a worksheet since the thousands of local taxing authorities have not standardized their real estate bills. IRS believes the new instructions are detailed enough to include the need for a worksheet. GAO accepts this explanation.

    Recommendation: The Commissioner of Internal Revenue should negotiate agreements with local governments on their sharing of data on real estate tax payments by individuals, and use the data in IRS enforcement programs.

    Agency Affected: Department of the Treasury: Internal Revenue Service

    Status: Closed - Not Implemented

    Comments: IRS has met with local governments on such sharing. However, due to resistance from some local governments and the IRS costs to match incompatible data, IRS will not be actively pursuing this recommendation.

    Matter for Congressional Consideration

    Matter: Congress should consider legislation that would require states to annually send IRS and taxpayers an information return on any cash rebates for real estate tax payments.

    Status: Closed - Not Implemented

    Comments: The legislative proposal does not have the support of the NACO and is effectively dead.