Tax Insights

Your Guide to State, Local, Federal, Estate + International Taxation

IRS Matching – Better Success than Online Dating?

No IRS has not gotten into the online dating biz.  While I’m sure they tax it, matching couples is a bit beyond their scope. But IRS does share a very distinctive characteristic with online dating.  Try as they might, they don’t always get it right when it comes to making a good “match”.

As many are aware, the IRS uses third-party information reporting on forms in the 1099 series to increase voluntary compliance and improve collections. And there have been efforts over the years to expand third-party information reporting as their matching program has been at least somewhat successful in reminding some taxpayers of their sometimes “inadvertent” omissions of income from their tax returns. Recent requirements for Securities Brokers to provide more information to IRS are one example. But IRS doesn’t always get it right when it comes to “matching” on your tax return.

Let’s look at one example.  If you pay mortgage interest, you likely get a form 1098 from your lender each year at tax time.  This 1098 reports to both you and IRS, the amount of mortgage interest you paid in the most recently completed calendar year.  Mortgage interest is most overwhelmingly deducted on a 1040 schedule A.  If IRS goes to look there to “match up” the 1098 and does not see the number on your schedule A, a letter may be sent to you proposing changes to your tax return because of the “omission”. However if the mortgage interest is on a rental property that you report on your 1040 schedule E, that is where it will be found and where it should be. Not on schedule A.  And you may have to explain that in reply to IRS.

The above is just one of many examples and scenarios where the IRS (usually their automated systems) may fail to match properly to your tax return resulting in correspondence from them you may need to reply to.  Do they have more matching success than online dating?  I hope so!

Dale Jensen, CPA