General government: Real Estate Tax Deductions (2011-59)
Better information and outreach could help increase revenues by tens or hundreds of millions of dollars annually by addressing overstated real estate tax deductions.
Year Identified: 2011
Area Number: 59
Area Type: Cost Savings & Revenue Enhancement
2 Total Action(s)
To improve the Internal Revenue Service (IRS) examinations of the real estate tax deduction, examination guidance needs to clarify the type of evidence for verifying deductibility and to require examiners to ask taxpayers to substantiate deductions that appear to include nondeductible charges that are large, unusual, or questionable.
To improve the Internal Revenue Service (IRS) examinations of the real estate tax deduction, examination guidance needs to clarify the type of evidence for verifying deductibility and to require examiners to ask taxpayers to substantiate deductions that appear to include nondeductible charges that are large, unusual, or questionable.
No executive action taken. IRS had not addressed this action and had no plans to do so, as of December 2021. IRS did not agree with GAO's May 2009 recommendation, and the agency maintains that existing examination guidance provides examiners with sufficient information to properly examine this deduction. For tax years beginning after December 31, 2016, section 11042 of Public Law 115-97 caps the deduction for state and local taxes, including real estate taxes, at $10,000.
In its 2009 review, GAO found that some examiners were not confirming that taxpayers were entitled to deduct real estate charges claimed, even in situations where their deductibility may have been in question. As a result, GAO maintains that examiners are continuing to rely on guidance that is inadequate to properly examine this deduction and that action should be taken to clarify the guidance.
The Internal Revenue Service (IRS) needs to develop a cost-effective means of identifying local governments with potentially large nondeductible charges on their real estate tax bills, which will support targeted efforts to improve compliance. IRS then should work with these local governments to identify charges that are nondeductible and work with the localities and other third parties to help taxpayers correctly claim the deduction by clarifying for them what they can and cannot deduct. IRS should also use the information to target examinations covering the real estate tax deduction.
The Internal Revenue Service (IRS) needs to develop a cost-effective means of identifying local governments with potentially large nondeductible charges on their real estate tax bills, which will support targeted efforts to improve compliance. IRS then should work with these local governments to identify charges that are nondeductible and work with the localities and other third parties to help taxpayers correctly claim the deduction by clarifying for them what they can and cannot deduct. IRS should also use the information to target examinations covering the real estate tax deduction.
IRS took steps to develop a cost-effective means of identifying local governments with potentially large nondeductible charges on their real estate tax bills, but determined that no cost-effective means was available. As a result, IRS has not been able to use such information to perform targeted outreach to improve compliance as GAO recommended. However, to meet the spirit of GAO's recommendation, in 2010 IRS distributed guidance to local jurisdictions that provided examples of what is and is not deductible and suggested that local governments consider modifying their tax bills to alert taxpayers that certain items are not allowable as deductions on their federal income tax returns.
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