Report to the Joint Committee on 

Taxation 

United States Government Accountability Office

GAO 

July 2009 HOME MORTGAGE 

INTEREST 

DEDUCTION 

Despite Challenges 

Presented by Complex 

Tax Rules, IRS Could 

Enhance Enforcement 

and Guidance 

GAO-09-769 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

July 2009

HOME MORTGAGE INTEREST DEDUCTION

Despite Challenges Presented by Complex Tax Rules, IRS Could Enhance Enforcement and Guidance 

Highlights of GAO-09-769, a report to the 

Joint Committee on Taxation 

Complex home-mortgage interest 

deduction rules create problems 

for taxpayers and increase the 

potential for noncompliance. For 

example, the rules involve 

mortgage debt limits and how loan 

proceeds are used. 

GAO was asked to (1) describe 

how IRS detects noncompliance 

with the deduction’s rules and what 

IRS knows about the extent of 

noncompliance; (2) identify 

problems taxpayers face in 

complying with the deduction’s 

rules and challenges IRS faces in 

enforcing them; (3) assess options 

to give IRS more information to 

assist enforcement; and (4) 

determine if IRS’s guidance to 

taxpayers and its examiners 

provides information to calculate 

the deduction properly. GAO 

analyzed IRS enforcement data and 

interviewed IRS and industry 

officials. GAO did not consider 

statutory changes. 

What GAO Recommends

GAO recommends that IRS revise 

its main research program’s caseselection system to better detect 

debt-limit noncompliance; expand 

information reporting on taxpayers’ 

mortgages; revise tax forms, 

instructions, and examiner training; 

and test outreach programs. 

In commenting on a draft of this 

report, IRS agreed with five 

recommendations and said it will 

study the recommendations on 

expanding information reporting 

and testing outreach programs to 

reduce noncompliance. 

IRS enforcement and research programs do not provide an overall picture of 

mortgage interest deduction noncompliance. While its various compliance and 

research programs provide evidence of some mortgage interest deduction 

compliance problems, they leave gaps in what is known about the extent and 

specific nature of noncompliance. In particular, IRS knows little about the 

extent of noncompliance with various debt limits and rules regarding the use 

of home equity loans. The case selection system of IRS’s main research 

program also may have excluded possible noncompliant cases. IRS examiners 

partly attribute noncompliance to taxpayers and paid preparers not knowing 

deduction rules. 

Taxpayers’ problems in complying with the mortgage interest deduction rules 

include the many steps necessary to determine whether mortgage interest and 

points are deductible and the recordkeeping necessary to determine how the 

proceeds of home equity loans are used. The deduction’s complexity also 

poses challenges to IRS. Although mortgage interest payments above a 

threshold are reported to IRS, the information reported shows the dollar 

amount of interest a taxpayer paid in a year without regard to the limits on the 

amount of debt imposed by law. As a result, IRS lacks information that could 

help it efficiently detect noncompliance with deduction limits and must rely 

on costly examinations. 

Several options exist for expanding information reporting on taxpayers’ 

mortgages and using private sector data to enhance compliance. Useful 

information would include property addresses, debt balances, and an 

indicator of loan refinancing. This information would allow IRS to identify 

taxpayers reporting mortgage interest exceeding the acquisition debt limit. 

Third parties who send information reports to IRS initially may incur some 

additional costs to provide the data, but those costs are likely to be one-time 

expenses. Additional loan information from private sector sources also might 

help IRS detect home equity noncompliance. 

The schedule for reporting mortgage interest deductions does not explicitly 

state that the deduction is subject to limits. Further, IRS’s guidance for 

taxpayers and examiners provides a different interpretation for the acquisition 

debt limit than a prior tax court ruling, and the examiners’ guidance lacks 

examples of problem areas cited by examiners and practitioners. 

The Complexity of Determining the Deductibility of Home Mortgage Interest and Points

Note: The steps in the table do not reflect other complicating factors, such as interest on home equity 

debt generally not being deductible in alternative minimum tax computations. 

View GAO-09-769 or key components.

For more information, contact James R. White 

at (202) 512-9110 or whitej@gao.gov. 
Page i GAO-09-769 Mortgage Interest Deduction 

Contents 

Letter 1

Background 3

IRS’s Enforcement and Research Programs Do Not Provide an 

Overall Picture of Mortgage Interest Deduction Noncompliance 7

Taxpayers Face a Variety of Problems Trying to Comply with 

Mortgage Interest Deduction Rules, and IRS Faces Challenges in 

Detecting Noncompliance 10

Options Exist for Expanding Mortgage Information Reporting and 

Using Private Sector Data to Enhance Enforcement 14

IRS’s Guidance to Taxpayers and Training Materials for Examiners 

Did Not Indicate the Range of Possible Mortgage Interest 

Deduction Situations 20

Tax Software Differed in the Ease of Navigating Mortgage Interest 

Deduction Instructions 23

Conclusions 24

Recommendations for Executive Action 24

Agency Comments and Our Evaluation 25

Appendix I Scope and Methodology 27 

Appendix II Schedule A, Itemized Deductions 30 

Appendix III Examination Results Involving Mortgage Interest 

Deductions 31 

Appendix IV Examples Illustrating Mortgage Interest Deduction’s 

Complexity 32 

Appendix V Descriptive Data on Home Mortgage Interest 

Deduction Claims and Form 1098 Filings 36 
Appendix VI Margins of Error Tables for Estimates in Appendix V 45 

Appendix VII SMR Research’s Data on Home Equity Debt and How 

IRS Might Use Similar Data for Enforcement 52 

Appendix VIII Comments from the Internal Revenue Service 54 

Appendix IX GAO Contact and Staff Acknowledgments 58 

 

Tables 

Table 1: Limitations on Mortgage Interest Deductibility by Type of 

Debt 4

Table 2: Amounts of Mortgage Interest Deductions, Home Sales 

Prices, and Home Equity Debt in 2001 and 2006 6

Table 3: What IRS’s Main Research and Enforcement Programs Do 

and Do Not Show about Mortgage Interest Deduction 

Compliance 9

Table 4: Results of IRS’s Fiscal Year 2008 Examinations of 

Schedule A, Line 10 for CIP and non-CIP Examinations 31

Table 5: IRS Worksheet to Figure Home Mortgage Interest 34

Table 6: Number and Dollar Total of Schedule A, Line 10 

Deductions per Number of Form 1098 Filings, 2004 

through 2006 37

Table 7: Distribution of Schedule A, Line 10 Deductions in Select 

Percentiles per Number of Form 1098 Filings, 2004 

through 2006 38

Table 8: Results of Comparing Total Schedule A, Line 10 Deduction 

Amounts to Amounts Reported on Form 1098, 2004 

through 2006 39

Table 9: Percentile Distributions for Schedule A, Line 10 Amounts 

Compared with Form 1098 Amounts and the Difference 

between Schedule A, Line 10 Amounts and Form 1098 

Amounts, 2004 through 2006 40

Page ii GAO-09-769 Mortgage Interest Deduction 
Table 10: Year-to-Year Changes in Amount Deducted on Schedule 

A, Line 10, 2004 through 2006 41

Table 11: Year-to-Year Changes in the Number of Form 1098 

Filings, with Distribution of Change Amounts on Schedule 

A, Line 10, 2004 through 2006 42

Table 12: Numbers of Matching Loan Account Numbers on Forms 

1098, 2004 through 2006 43

Table 13: Number of Individual Tax Returns with Schedule A 

Mortgage Interest Deductions and Non-Schedule A 

Mortgage Interest Deductions, 2004 through 2006 44

Table 14: Margins of Error for Number and Dollar Total of 

Schedule A, Line 10 Deductions per Number of Form 1098 

Filings, 2004 through 2006 45

Table 15: Margins of Error for Distribution of Schedule A, Line 10 

Deductions in Select Percentiles per Number of Form 1098 

Filings, 2004 through 2006 46

Table 16: Margins of Error for Results of Comparing Total 

Schedule A, Line 10 Deduction Amounts to Amounts 

Reported on Form 1098, 2004 through 2006 47

Table 17: Margins of Error for Percentile Distributions for Schedule 

A, Line 10 Amounts Compared with Form 1098 Amounts 

and the Difference between Schedule A, Line 10 Amounts 

and Form 1098 Amounts, 2004 through 2006 48

Table 18: Margins of Error for Year-to-Year Changes in Amount 

Deducted on Schedule A, Line 10, 2004 through 2006 49

Table 19: Margins of Error for Year-to-Year Changes in the Number 

of Form 1098 Filings, with Distribution of Change 

Amounts on Schedule A, Line 10, 2004 through 2006 49

Table 20: Margins of Error for Number of Matching Loan Account 

Numbers on Forms 1098, 2004 through 2006 50

Table 21: Margins of Error for Numbers of Individual Income Tax 

Returns with Schedule A Mortgage Interest Deductions 

and Non-Schedule A Mortgage Interest Deductions, 2004 

through 2006 51

Table 22: Types of Transactions Included in SMR Research’s Home 

Equity Debt Calculations 52

Figures 

Figure 1: IRS Chart Illustrating How to Determine Whether 

Mortgage Interest Is Fully Deductible as Shown in 

Publication 936 12

Page iii GAO-09-769 Mortgage Interest Deduction 
Figure 2: Current Form 1098 Information Compared with Options 

for Additional Mortgage Debt Information 16

Figure 3: Internal Revenue Service Schedule A on Which the Home 

Mortgage Interest Deduction Is Taken 30

Abbreviations 

AIMS Audit Information Management System 

AMT Alternative Minimum Tax 

CDW Compliance Data Warehouse 

CIP Compliance Initiative Project 

EOAD Examination Operational Automation Database 

IRS Internal Revenue Service 

NRP National Research Program 

SOI Statistics of Income 

This is a work of the U.S. government and is not subject to copyright protection in the 

United States. The published product may be reproduced and distributed in its entirety 

without further permission from GAO. However, because this work may contain 

copyrighted images or other material, permission from the copyright holder may be 

necessary if you wish to reproduce this material separately. 

Page iv GAO-09-769 Mortgage Interest Deduction 
Page 1 GAO-09-769 Mortgage Interest Deduction 

 

United States Government Accountability Office

Washington, DC 20548 

 

July 29, 2009 

The Honorable Charles B. Rangel 

Chairman 

Joint Committee on Taxation 

House of Representatives 

The Honorable Max Baucus 

Vice Chairman 

Joint Committee on Taxation 

United States Senate 

The home mortgage interest deduction is the third most expensive federal 

income tax expenditure, with the government expected to forgo about $80 

billion of revenue for the deduction in 2009.1

 Subject to various 

limitations, taxpayers may deduct interest on home-secured loans, such as 

mortgages, mortgage refinancings, and home equity loans, including those 

taken as lump sum amounts and home equity lines of credit. 

The rules that taxpayers must follow in determining the proper amount of 

mortgage interest to deduct can be complex. For example, there are 

limitations on the amount of debt for which interest can be deducted, 

special rules for refinancing, situations where alternative minimum tax 

(AMT) considerations apply, and rules on the deductibility of prepaid 

interest amounts called points. In general, complex tax rules increase the 

potential for noncompliance. 

You asked us to study the home mortgage interest deduction to determine 

if there are administrative issues that need to be addressed to improve 

taxpayer compliance and Internal Revenue Service (IRS) enforcement. For 

this report, we (1) provide information on how IRS detects taxpayers’ 

noncompliance with the home mortgage interest deduction rules and what 

it knows about the extent of noncompliance; (2) identify the problems, if 

any, taxpayers face in attempting to comply with the deduction and 

describe IRS’s challenges in detecting mortgage interest deduction 

noncompliance; (3) assess options to give IRS more information to enforce 

1

The most expensive income tax expenditures are reduced rates of tax on dividends and 

long-term capital gains (about $148 billion of forgone revenue) and the exclusion of 

employer contributions for health care, health insurance premiums, and long-term care 

insurance (about $127 billion). 
compliance with the rules; (4) determine whether IRS’s guidance to 

taxpayers and its examiners’ guidance and training on the deduction 

provide enough information to properly calculate the taxpayers’ allowable 

mortgage interest deduction; and (5) describe how tax-return preparation 

software programs handle the deduction. You also asked us to provide 

descriptive information on taxpayers’ mortgage interest deductions and 

mortgage interest payments reported on Form 1098, Mortgage Interest 

Statement. Appendix V provides this information. Consideration of 

statutory changes was beyond the scope of our report. 

To address our objectives, we analyzed IRS’s efforts to determine taxpayer 

compliance with the mortgage interest deduction. This included examining 

information on IRS’s compliance initiative projects that focused on the 

deduction and on IRS’s other routine examination activities.2

 We also 

analyzed information from IRS’s Statistics of Income (SOI) Division and 

Compliance Data Warehouse (CDW) databases to compile information 

about individuals’ year-to-year changes in claiming the deduction and 

obtained statistical information from the private sector on home equity 

loans, home equity lines of credit, and refinancings. We reviewed relevant 

studies and publications and interviewed cognizant IRS officials and 

representatives from the tax preparation and mortgage banking industries 

to obtain information on the issues surrounding administration of the 

deduction. 

We determined whether IRS’s guidance to taxpayers prominently 

mentioned the limitations on the amount of debt for which interest can be 

deducted. To determine whether IRS examiners’ training and guidance 

provided enough information on properly calculating the mortgage 

interest deduction, we compared IRS’s examination training and guidance 

with tax law and instructions. We also analyzed how several tax 

preparation software packages that are widely used by individual 

taxpayers or paid preparers handled the calculation of the deduction by 

reviewing appropriate parts of the software to determine how they treated 

the debt limitations and by interviewing company officials. We performed 

tests that determined the data used in this report were reliable for our 

purposes. Appendix I provides a more detailed discussion of our scope 

and methodology. 

 

2

We use the term “routine” to cover examinations that include the mortgage interest 

deduction but are not part of an IRS compliance initiative project that focused on it. 

Page 2 GAO-09-769 Mortgage Interest Deduction 
We conducted this performance audit from May 2008 through July 2009 in 

accordance with generally accepted government auditing standards. Those 

standards require that we plan and perform the audit to obtain sufficient, 

appropriate evidence to provide a reasonable basis for our findings and 

conclusions based on our audit objectives. We believe that the evidence 

obtained provides a reasonable basis for our findings and conclusions 

based on our audit objectives. 

Taxpayers have been allowed to deduct mortgage interest payments on 

their federal tax returns since Congress enacted the federal income tax in 

1913. At that time, the deduction for home mortgage interest was part of 

the deduction allowed for any interest paid. The Tax Reform Act of 1986 

limited deductions for nonbusiness interest.3

 The 1986 act specifically 

disallowed deductions by individuals of personal interest but included a 

limited exception for qualified mortgage interest. The 1986 act was 

amended the next year to include dollar limits on the amount of home 

mortgage debt for which interest payments can be deducted.4

Background 

Taxpayers may deduct the interest they pay on loans secured by qualified 

homes—either their main home or their main home and a second home. 

These loans include first or second mortgages, home equity loans, and 

home equity lines of credit. Boats and recreational vehicles may qualify as 

homes if they have sleeping, cooking, and toilet facilities. 

As table 1 shows, two kinds of debt may qualify for the mortgage interest 

deduction. The first kind is acquisition debt, which is debt incurred in 

acquiring, constructing, or substantially improving a qualified home and 

that is secured by the home. Taxpayers may deduct all of the interest paid 

on acquisition debt incurred on or before October 13, 1987, known as 

grandfathered debt. Taxpayers’ interest deductions for debt on qualified 

homes purchased after October 13, 1987, is limited to the interest on $1 

million of acquisition debt, reduced by any grandfathered debt. 

 

3

Pub. L. No. 99-514 (Oct. 22, 1986). 

4

Omnibus Budget Reconciliation Act of 1987, Pub. L. No. 100-203 (Dec. 22, 1987). 

Page 3 GAO-09-769 Mortgage Interest Deduction 
Table 1: Limitations on Mortgage Interest Deductibility by Type of Debt 

Category of limitation or 

deductibility Acquisition debt Home equity debt 

Dollar limitation on debt on 

which interest is deductible 

Limited to $1 milliona

 reduced by grandfathered 

debt 

Limited to lesser of (1) $100,000a

 or (2) home’s 

fair market value minus acquisition debt and 

grandfathered debt 

Limitation on use of loan 

proceeds on which interest is 

deductible 

Limited to acquiring, constructing, or substantially 

improving a home 

May be used for anything, including credit card 

payments, cars, tuitions, and vacations 

Interest deductibility for 

alternative minimum tax (AMT) 

purposes 

Generally deductible Generally not deductible unless proceeds are 

used to buy, build, or improve a home 

Limitation on the refinancing 

amount on which interest may 

be deducted 

Limited to the balance of the old mortgage before 

refinancing; refinancing cannot increase acquisition 

debt except to substantially improve the home 

Refinancing amount above the acquisition debt 

balance is home equity debt, up to the home 

equity debt limitation 

Deductibility of points Deductible in the year paid if various conditions are 

met and the loan is used to buy, build, or improve 

taxpayer’s main home; if certain other tests are 

met, points are deductible over the life of the loan; 

when refinancing, except in states covered by the 

Eighth Circuit Court of Appeals or when used to 

improve taxpayer’s main home and certain 

conditions are met, points are deductible over the 

life of the loan 

Deductible over the life of the loan 

Source: GAO analysis of mortgage interest deduction rules. 

Note: Deductibility assumes itemization of deductions, legal liability for the loan, and a mortgage 

secured by a qualified home in which the taxpayer has an ownership interest. 

a

Acquisition debt and home equity debt are limited to $500,000 and $50,000, respectively, for married 

people filing separately. 

The second kind of qualified debt is home equity debt, which is any nonacquisition debt secured by the home. Its proceeds may be used for 

anything other than to buy, build, or substantially improve the home. For 

example, the proceeds may be used to pay off credit cards or finance cars 

or vacations. Home equity debt is limited to the home’s fair market value 

minus the acquisition debt and grandfathered debt, or to $100,000, 

whichever is less. Home equity debt for tax purposes should not be 

confused with what is commonly called a home equity loan. The latter may 

Page 4 GAO-09-769 Mortgage Interest Deduction 
qualify as either acquisition debt or home equity debt depending on how 

the proceeds are used.5

Table 1 also summarizes the deductibility of points. A point is a term used 

to describe certain charges paid in connection with obtaining a mortgage 

and is calculated at 1 percent of a mortgage’s principal. Generally, points 

are considered prepaid interest, and, as such, the deduction is usually 

allocated over the life of the loan. However, if various conditions are met, 

the taxpayer may deduct the points in the year paid.6

 Determining 

whether points are fully deductible in the year paid may require that 

taxpayers go through as many as 10 decision steps. 

Lending institutions and other entities engaged in a trade or business that 

receive $600 or more during the year in mortgage interest and certain 

points from an individual taxpayer are required to file a Form 1098, 

Mortgage Interest Statement. Form 1098 reports are sent both to the 

taxpayer and IRS to show how much mortgage interest was paid to the 

lender that year. 

Taxpayers report their deductible mortgage interest information to IRS on 

lines 10 through 13 of Schedule A, the schedule itemizing deductions for 

the Form 1040 individual income tax return (see app. II). Typically, the 

larger deductible amounts are reported on line 10, which shows home 

mortgage interest and points reported to taxpayers on Form 1098. Lines 11 

and 12 of Schedule A are for claiming mortgage interest and points, 

respectively, not reported on Form 1098,7

 and, starting in 2007, line 13 is 

used for deductible qualified mortgage insurance premiums. Some interest 

payments reported on Form 1098 may be deductible on other Form 1040 

schedules, such as Schedule C for sole proprietorship businesses or 

Schedule F for farming. 

 

5

According to information published in a 2009 Federal Reserve Bulletin, homeowners used 

about 40 percent of the equity borrowed from their homes in 2007 for home improvements. 

See Brian K. Bucks, Arthur B. Kennickell, Traci L. Mach, and Kevin B. Moore, “Changes in 

U.S. Family Finances from 2004 to 2007: Evidence from the Survey of Consumer 

Finances,” Federal Reserve Bulletin, vol. 95, Feb. 12, 2009. 

6

These conditions include whether the points were paid in connection with the purchase or 

improvement of the principal residence securing the mortgage, the payment of points was 

an established business practice in the area where the loan was made, and the amount paid 

for the points did not exceed the amount generally charged for points in that area. 

7

For instance, the taxpayer might have paid home mortgage interest to the person selling 

the home, and that person did not have to supply a Form 1098. 

Page 5 GAO-09-769 Mortgage Interest Deduction 
Changes in the housing market over the years may have affected the 

overall amount of home mortgage interest that taxpayers claimed. Table 2 

shows the change in various indicators related to the mortgage interest 

deduction from 2001 to 2006. The rise in home prices and thus mortgage 

amounts, partly account for the large increases in mortgage interest 

deductions claimed by taxpayers in 2006 compared to 2001. In 2006, the 

median sales price for existing U.S. single-family homes was up from 2001. 

Median sales prices varied widely across metropolitan areas, with some 

locations exceeding $700,000. The home equity loan totals reported by the 

Federal Reserve Board also increased significantly from 2001 to 2006. 

According to the U.S. Census Bureau’s 2006 American Community Survey, 

about a fifth of owner-occupied housing units with a mortgage had a home 

equity loan. Also, according to the Joint Center for Housing Studies of 

Harvard University, 85 percent of homeowners who refinanced their 

mortgages in 2006 took cash out. 

Table 2: Amounts of Mortgage Interest Deductions, Home Sales Prices, and Home 

Equity Debt in 2001 and 2006 

Indicator related to the mortgage interest deduction 2001 2006

Taxpayers’ Schedule A, line 10 deductions $323 billion $437 billion

Number of returns with amounts claimed on line 10 36 million 39 million

Average line 10 deduction $9,000 $11,200 

 

Median home sales price $156,600 $221,900

Home equity loan amounts reported by the Federal 

Reserve Board 

$439 billion $1,019 billion

The part of home equity taken out as cash above the 

amount needed for the refinancing of prime, first-lien, 

conventional mortgages, as reported by Freddie Mac 

$83 billion $318 billion

Sources: IRS, Statistical Abstract of the U.S., Federal Reserve Board, Freddie Mac, and GAO calculations. 

Note: Numbers are rounded and dollars are not adjusted for inflation. Mortgage interest deduction 

limitations have not changed with inflation. 

Page 6 GAO-09-769 Mortgage Interest Deduction 
IRS’s Enforcement 

and Research 

Programs Do Not 

Provide an Overall 

Picture of Mortgage 

Interest Deduction 

Noncompliance 

Although IRS’s enforcement and research programs found some mortgage 

interest deduction compliance problems, the methods leave gaps in what 

is known about the extent and specific nature of noncompliance. The four 

main programs that IRS uses to enforce or research mortgage interest 

deduction compliance include the following. 

• A computer matching program designed to identify taxpayers whose 

mortgage interest deduction exceeds amounts reported on Form 

1098: Of the approximately 1.7 million mismatches the program 

identified above a certain threshold in 2005, the latest year available, 

IRS followed up on about 135,000 and changed tax assessments or 

refunds for about 53,000.8 Tax assessments totaled about $216 million, 

much more than in previous years, and averaged about $4,300. 

• IRS’s National Research Program (NRP), the main ongoing study of 

taxpayer compliance based on examinations of a random sample of 

tax returns: IRS found that between 12 and 14 percent of individual 

taxpayers who claimed home mortgage interest on line 10 of Schedule 

A misreported the amount. The misreporting was split about evenly 

between taxpayers underreporting the deduction and taxpayers 

overreporting it. 

• Routine examinations done by correspondence, in an IRS office, or 

on site: IRS does not maintain separate examination results solely on 

line 10 issues. Most of the approximately 33,000 examinations done in 

fiscal year 2008 by IRS revenue agents and tax compliance officers that 

included a review of line 10 resulted in increases to the line 10 

deduction (i.e., the deduction increased) or in no recommended 

change. For cases involving line 10 where examiners recommended 

greater tax amounts, the median tax owed for all issues examined 

including line 10 was $4,612, according to our analysis of IRS records. 

For cases closed in fiscal year 2008 in which examiners decreased the 

line 10 amounts and lowered taxpayers’ deductions, the median 

decrease in the line 10 mortgage interest deduction was $6,430. Other 

results are listed in appendix III. 

• Two special compliance initiative projects (CIP) primarily 

examining acquisition debt for a limited segment of individual 

taxpayers with high mortgage interest deductions or high adjusted 

 

8

Because of resource constraints and expected return on the work, IRS does not pursue all 

of the discrepancies it identifies. 

Page 7 GAO-09-769 Mortgage Interest Deduction 
gross incomes: About 9,000 examinations were closed in fiscal year 

2008 for both projects. IRS recommended about $95 million in tax 

changes for cases closed in fiscal years 2006 through 2008. Examiners 

decreased line 10 deductions for most cases closed in fiscal year 2008. 

The median decreases were about $29,000 for the first project and 

$28,000 for the second. For cases in which examiners increased the tax 

owed, the median increases in tax were about $8,000 in both projects. 

IRS examiners attributed the changes to taxpayers and paid tax return 

preparers not knowing or ignoring the mortgage interest deduction 

rules and to problematic tax preparation software.9

 Appendix III also 

presents results from CIP exams. 

Table 3 shows, for these four main programs, that gaps exist in what IRS 

can measure or enforce concerning taxpayers’ mortgage interest 

deductions. 

 

9

About 64 percent of tax returns with a Schedule A, line 10 deduction were done by a paid 

preparer in 2006. The margin of error for this estimate was less than 1 percent. 

Page 8 GAO-09-769 Mortgage Interest Deduction 
Table 3: What IRS’s Main Research and Enforcement Programs Do and Do Not Show about Mortgage Interest Deduction 

Compliance 

Program The program shows... The program does not show... 

Matching program • Situations in which taxpayers deduct more 

interest than what was reported on Form 

1098. 

• Noncompliance in which taxpayers should have 

deducted less interest than the amount shown 

on Form 1098. 

• Discrepancies that fall under IRS thresholds for 

follow-up. 

National Research 

Program 

• Population estimates for misreported 

mortgage interest for 2001. 

• Recent noncompliance information; complete 

results from IRS’s ongoing compliance studies 

are not expected to be available for more than 2 

years. 

• Noncompliance in which taxpayers’ deductions 

and Form 1098 amounts match. NRP 

automatically excluded returns from further 

consideration if the Form 1098 amounts matched 

the Schedule A amounts, unless another 

problem was found. 

Routine examinations • Adjustments to taxpayers’ line 10 deductions 

and other tax changes for each tax year. 

• Noncompliance that examiners miss because 

examination selection methods do not consider 

possible noncompliance with home equity debt 

limits. 

CIPs • Recent years’ adjustments to line 10 

deductions and other tax changes for a select 

group of taxpayers with high adjusted gross 

incomes or high mortgage interest deductions; 

focus was on acquisition debt. 

• Noncompliance by taxpayers beyond the 

narrowly defined groups examined in the 

projects. 

All of the above • Information that IRS can use to categorize the 

reasons that misreporting occurred. For 

example, none of the programs compile data that 

isolate misreporting because of violations of the 

limits on acquisition or home equity debt. 

Source: GAO analysis of IRS interviews and data. 

Of the four main programs, only NRP projects the amount of mortgage 

interest deduction misreporting to the population of individual taxpayers. 

However, because NRP automatically excluded any Schedule A deduction 

where the Form 1098 amounts matched the Schedule A amounts, it may 

have underestimated mortgage interest deduction misreporting relating to 

the home equity and acquisition debt limits. 

Page 9 GAO-09-769 Mortgage Interest Deduction 
Taxpayers Face a 

Variety of Problems 

Trying to Comply with 

Mortgage Interest 

Deduction Rules, and 

IRS Faces Challenges 

in Detecting 

Noncompliance 

The mortgage interest deduction rules create compliance problems for 

taxpayers, reflecting the deduction’s complexity. The effects of the 

problems, however, are uneven. Although many taxpayers might 

encounter few problems, others could face many more. Problems cited by 

tax practitioners and in our review of articles on deducting home 

mortgage interest included the following: 

• Taxpayers need to distinguish between acquisition and home equity 

debt but did not always do so. 

• Taxpayers deducted interest on loans exceeding the limitations, 

including the acquisition, home equity, and two-home limits. 

• Taxpayers who were subject to the AMT and thus not eligible to deduct 

home equity interest claimed it nonetheless. 

• Tax practitioners also missed the limitations and did not comply with 

the AMT rules. 

• Depending on the circumstances, some taxpayers and practitioners 

faced extensive recordkeeping and calculations related to such matters 

as refinancing, the AMT, business use of the home, other uses of loan 

proceeds, and the periodic use and repayment of home equity lines of 

credit. One practitioner told us that completing worksheets was the 

quick and easy part of work related to the mortgage interest deduction; 

the most difficult and most time-consuming part was getting taxpayers 

to locate and provide the proper information on what kind of debt was 

involved and how loan proceeds were used. Typically, taxpayers 

provided records piecemeal over time and after many phone calls. 

 

• Taxpayers may have been unaware that they might need 

documentation on matters such as how proceeds of home equity loans 

are spent to properly determine the amount of the mortgage interest 

deduction on their tax returns. 

• Mortgage interest deduction limits based on debt amounts are not 

directly comparable with the information on Form 1098, which lists 

interest paid. If taxpayers’ debts exceed the limits, taxpayers must 

calculate how much interest they can deduct. 

The complexity of the laws that govern the mortgage interest deduction 

are evident in the guidance IRS has published. Figure 1 is the flowchart in 

IRS’s 16-page instructions to taxpayers—Publication 936: Home Mortgage 

Page 10 GAO-09-769 Mortgage Interest Deduction 
Interest Deduction—that help taxpayers determine if their mortgage 

interest is fully deductible.10 It leads taxpayers through as many as seven 

decision points and still sometimes requires them to consult another part 

of the publication. Appendix IV provides two examples of the mortgage 

interest deduction’s complexity. 

 

10Department of the Treasury, Internal Revenue Service, Publication 936: Home Mortgage 

Interest Deduction: For Use in Preparing 2008 Returns. 

Page 11 GAO-09-769 Mortgage Interest Deduction 
Figure 1: IRS Chart Illustrating How to Determine Whether Mortgage Interest Is Fully Deductible as Shown in Publication 936 

Source: Department of the Treasury, Internal Revenue Service, Publication 936: Home Mortgage Interest Deduction: For Use in 

Preparing 2008 Returns.

Page 12 GAO-09-769 Mortgage Interest Deduction 
Addressing Compliance 

Problems and Complexity 

Would Likely Require 

Policy Changes 

To alleviate the problems and complexity facing taxpayers complying with 

the mortgage interest deduction rules, policy makers likely would have to 

change tax laws. For example, we noted in the past that shifting mortgage 

interest deduction limits from debt amounts to an interest-limit cap could 

simplify administration of the deduction.11 Under an interest-limit cap, IRS 

could more easily compare the amounts reported on Schedule A and Form 

1098 to the cap and identify cases for audit or follow-up. Similarly, 

taxpayers would have only to report the amount of Form 1098 interest that 

fell under the cap and would not have to figure out which property 

qualified or how to account for debt limits, depending on how any new 

legislation was written. 

However, changing the tax code for qualified residential mortgage interest 

deductions could have significant tax policy implications. For example, an 

interest-paid cap could cause taxpayers living in areas with high housing 

prices to be disadvantaged compared with taxpayers with similar incomes 

living in areas with low housing prices. A cap could also disadvantage 

those who borrowed during periods of high interest rates. Assessing such 

policy changes and whether such consequences would be appropriate are 

beyond the scope of this report. 

Because Mortgage Interest 

Reported on Form 1098 Is 

Not Directly Comparable 

to Legal Debt Limits, IRS 

Must Use Costly Methods 

to Detect Certain 

Noncompliance 

Because the Form 1098 information report shows the dollar amount of 

interest a taxpayer paid in a year without regard to the limits on the 

amount of debt imposed by law, IRS’s computer matching program 

comparing Form 1098 and tax return amounts will not detect certain 

noncompliance. For example, as already discussed, taxpayers cannot 

claim a deduction for interest exceeding the $1 million acquisition debt 

limit or other limitations. However, the annual information report for a 

taxpayer with a $1.5 million acquisition mortgage would show the interest 

paid on the entire mortgage instead of the interest on the $1 million under 

the annual debt limit. Because of this, the information IRS receives from 

third parties on Form 1098 cannot be used by itself to determine if 

taxpayers improperly claimed interest on debt in excess of the legal 

limitations. 

However, the way to overcome this problem—using examinations to 

detect noncompliance—is expensive compared to automated matching 

 

11GAO, Tax Policy: Many Factors Contributed to the Growth in Home Equity Financing 

in the 1980s, GAO/GGD-93-63 (Washington, D.C.: Mar. 25, 1993). 

Page 13 GAO-09-769 Mortgage Interest Deduction 
programs, and its payoff in increased revenue is low. For example, 

according to IRS examiners, pinpointing which tax returns have a homeequity debt noncompliance issue is very labor intensive. 

As shown earlier, for non-CIP line 10 examinations by revenue agents and 

tax compliance officers closed in fiscal year 2008, the median decrease to 

line 10 was $6,430, according to our analysis of IRS data. At the highest 

individual tax rate of 35 percent and assuming no offsetting factors, the 

resulting increase in tax revenue would be about $2,250. Although not an 

exact comparison, the average tax assessment IRS recommended for field 

examinations of individual taxpayers was about $19,150 per taxpayer. 

Given the non-CIP examinations’ relatively low payoff, some practitioners 

we interviewed said the tax code as it relates to the home mortgage 

interest deduction is unenforceable in a practical sense. 

Additional information about taxpayers’ mortgages could help IRS identify 

the most productive cases to examine and determine whether taxpayers 

are claiming the correct amount of mortgage interest deduction. IRS could 

obtain more helpful information about taxpayers’ mortgages by expanding 

information collected on Form 1098. IRS officials said that in 

implementing certain additional reporting requirements, the agency would 

need to meet the terms of the Paperwork Reduction Act, which requires 

agencies to minimize the paperwork burden they impose on the public and 

maximize the practical utility of the information they collect.12

Options Exist for 

Expanding Mortgage 

Information Reporting 

and Using Private 

Sector Data to 

Enhance Enforcement 

IRS officials also said attention would need to be paid to the added costs 

that expansion would impose on third parties and IRS, such as updating 

computer systems. Any computer programming changes for IRS and third 

parties would likely be done only once to accommodate the new 

information. 

Form 1098 could be revised to collect the following information: 

• address of the property secured by the mortgage to which the interest 

on the form relates; 

 

12Paperwork burden is defined as the time spent reading and understanding a request for 

information, as well as the time spent developing, compiling, recording, reviewing, and 

providing that information. 

Page 14 GAO-09-769 Mortgage Interest Deduction 
• outstanding mortgage debt balances on the property; 

• an indicator if the mortgage interest is for a loan that was refinanced 

during the year; and 

• an indicator of whether the mortgage interest relates to an acquisition 

loan or a home equity loan. 

Figure 2 shows what a Form 1098 might look like if revised to collect any 

of this information. We found that some companies that submit Form 1098 

statements to IRS already provide some of this information with the Form 

1098 statements they send to borrowers. These options could be 

considered singly or in combination. Further, changes to Form 1098 

reporting requirements would need to apply only to future reports to give 

filers sufficient time to adjust their computer systems to collect and 

calculate the additional information. 

Page 15 GAO-09-769 Mortgage Interest Deduction 
Figure 2: Current Form 1098 Information Compared with Options for Additional Mortgage Debt Information 

Form 1098

Mortgage

Interest 2008 Statement

8181

OMB No. 1545-0901 

Copy A 

For

Internal Revenue 

Service Center 

File with Form 1096. 

For Privacy Act and Paperwork 

Reduction Act 

Notice, see the 

2008 General 

Instructions for 

Forms 1099, 1098, 5498, and W-2G. 

VOID CORRECTED

RECIPIENT’S/LENDER’S name, address, and telephone number 

RECIPIENT’S federal identification no. PAYER’S social security number 

PAYER’S/BORROWER’S name 

Street address (including apt. no.) 

City, state, and ZIP code 

Account number (see instructions) 

1 Mortgage interest received from payer(s)/borrower(s) 

$

2 Points paid on purchase of principal residence 

$

3 Refund of overpaid interest 

$

4 Mortgage insurance premiums

$

5

Source: GAO analysis of IRS information.

Form 1098 Cat. No. 14402K Department of the Treasury - Internal Revenue Service

Do Not Cut or Separate Forms on This Page — Do Not Cut or Separate Forms on This Page 

Possible

additions to 

Form 1098

Current

Form

1098

6 Address of secured property

7 Beginning and ending principal balances

$

8 Refinancing this year?

9 Loan Type

Yes No

Acquisition Home equity

$

Adding the Address of 

Mortgaged Property to 

Form 1098 

If the address relating to taxpayers’ mortgage interest deductions were on 

the Form 1098 (see fig. 2, box 6) and electronically captured in IRS 

databases, IRS could use an automated process to determine whether the 

mortgage interest taxpayers claimed corresponded to a qualified residence 

and was eligible for the deduction. For example, IRS could see if an 

Page 16 GAO-09-769 Mortgage Interest Deduction 
address reported on Form 1098 matched the address that the taxpayers 

listed on their Form 1040.13 Tax preparers told us that requiring the 

property address also would help them prepare returns more accurately 

because they could use the information to determine if the property 

securing the debt is the taxpayer’s qualified home. Some IRS officials 

responsible for examination policy whom we interviewed agreed the 

property address would be useful in selecting returns for examination and 

in cases where taxpayers have more than one home. 

We previously recommended that IRS revise Form 1098 to collect the 

address of the property whose mortgage is reported on Form 1098.14 In 

response, IRS agreed to consider implementing our recommendation, 

citing the burden the requirement could place on third parties. 

Representatives of the mortgage banking industry told us that it would be 

feasible to report property address information on Form 1098 because 

mortgage lenders already maintain this information. We also found an 

example of a lender that provided address information with Form 1098 

information that it sent to borrowers. 

Adding Mortgage Balance 

Information to the Form 

1098 

If the beginning and ending mortgage debt balances or average annual 

debt balances were provided on Form 1098, IRS could electronically 

identify taxpayers with more than $1 million in mortgage debt (see fig. 2, 

box 7) or identify taxpayers whose mortgage interest deductions appeared 

out of proportion to their debt amounts. IRS officials said that debt 

balance information would be particularly helpful in selecting returns for 

examination if combined with the address information because the 

additional information would help disentangle mortgage interest 

deductions of taxpayers with multiple homes. 

According to a mortgage industry representative, Form 1098 filers could 

provide debt balance information. We found examples of companies that 

provided information on mortgage balances on the Form 1098 statements 

they sent to borrowers. However, industry representatives further stated 

that companies do not necessarily have accurate balance information at a 

particular point in time and that average balances would be easier for the 

 

13This procedure would not be useful for determining whether taxpayers correctly 

deducted mortgage interest on a second home. 

14GAO, Tax Gap: Actions That Could Improve Rental Real Estate Reporting Compliance, 

GAO-08-956 (Washington, D.C.: Aug. 28, 2008). 

Page 17 GAO-09-769 Mortgage Interest Deduction 
industry to report than balances pegged to any specific day, especially for 

home equity lines of credit. For companies that do not keep average 

balance information now, they would incur the associated set-up costs of 

collecting the information in the future. 

Adding a Check Box to the 

Form 1098 to Indicate 

Refinancing 

Form 1098 could be redesigned with a check box for filers to show 

whether a mortgage was refinanced (see fig. 2, box 8). This would help IRS 

identify taxpayers who might be noncompliant with rules specific to 

refinancing, such as the rule to amortize points paid on the mortgage. A 

mortgage industry representative said that the burden of a refinancing 

check box could be reduced if the rule were only to complete the box in 

the year that the loan was made, eliminating the need for a Form 1098 filer 

to track over time whether a refinancing had occurred. Also, Form 1098 

filers do not uniformly keep any indication in their records as to whether 

loans are acquisition loans or refinancing. However, because the 

deductibility of the interest on the cash taken out in a refinancing depends 

in part on how the money is spent, identifying refinancing would not 

necessarily eliminate the need for IRS to examine returns. 

It also would be helpful to IRS if Form 1098 filers could show whether 

cash was taken out in a refinancing, but such a change might not be able 

to include the amount of cash. The mortgage industry representative said 

that any information on the cash taken out would be unreliable and 

burdensome for Form 1098 filers to get. Form 1098 filers have estimates 

on cash taken out, not the final figures available to the closing agent. The 

industry representative also said that Form 1098 filers do not maintain 

information on whether loan proceeds exceeded the amount of the loan 

that was refinanced.15 However, IRS examiners could more easily see if 

cash were taken out at refinancing and investigate whether rules on 

refinancing were followed if Form 1098 had address, mortgage debt, and a 

refinancing check box, because they could see whether increases in the 

loan balances over time for a particular home took place. 

 

15The mortgage banking industry representative also said that Form 1098 filers would need 

guidance to know how to report loan modifications in which loan terms are changed to 

avoid foreclosure and which are not considered refinancing by the industry but could be by 

IRS. 

Page 18 GAO-09-769 Mortgage Interest Deduction 
Adding an Indicator to the 

Form 1098 to Distinguish 

between Home Equity and 

Acquisition Debt 

Tax forms do not require taxpayers or Form 1098 filers to report the types 

of debt on which mortgage interest deductions are based, even though the 

mortgage debt limitations for deducting interest are different for 

acquisition and home equity debt. If Form 1098 filers were required to 

identify the type of debt associated with the deduction (see fig. 2, box 9), 

IRS might more easily discern whether a taxpayer’s deduction exceeded 

the acquisition or home equity debt limit, especially if combined with 

reports of the debt amounts. Having Form 1098 filers identify debt types, 

however, would create challenges. A mortgage industry representative 

told us that Form 1098 filers do not always have information about debt 

types, especially if the loans have been sold and re-sold or the original loan 

has been refinanced. Form 1098 filers do not know whether mortgage 

refinancing proceeds were used for home improvements, which could 

qualify as acquisition debt or home equity debt, depending on how the 

money was used. The representative also said that if a home-equity debt 

reporting requirement were instituted, the industry would have to 

introduce costly and burdensome systems. 

Private Sector Data Might 

Be Useful to IRS in 

Detecting Mortgage 

Interest Noncompliance 

IRS already contracts with a private firm to obtain information about 

taxpayers for routine examination purposes. Other private sector data 

might also be useful to IRS in detecting mortgage interest noncompliance. 

For example, we obtained information from SMR Research, one of several 

companies that analyze loan information that IRS might find useful in 

determining taxpayer compliance with rules governing the deduction of 

interest on home equity loans. 

By comparing homeowners’ current mortgage debt for a particular 

property with earlier debt, SMR Research estimated that up to several 

million homeowners had loans that might have exceeded the home equity 

debt limitation. In the aggregate, these homeowners’ debts over the debt 

limitation were several hundred billion dollars.16 SMR Research’s data do 

not show whether taxpayers correctly reported deductions based on home 

equity loans. IRS would still have to check the returns. Given information 

underlying the transactions in SMR Research’s database and shown in 

appendix VII, IRS could test the use of this or similar private-sector 

databases to: 

 

16See appendix VII for the types of transactions that SMR Research included in its estimate. 

Page 19 GAO-09-769 Mortgage Interest Deduction 
• pinpoint taxpayers for examination, 

• initiate correspondence to taxpayers, or 

• conduct outreach to paid preparers. 

Some IRS CIP examiners told us they had significant findings related to 

home equity debt, indicating that follow-up might be productive. 

Taken as a whole, IRS taxpayer guidance—Schedule A and its 

instructions, Publication 17, Your Federal Income Tax, and Publication 

936, Home Mortgage Interest Deduction—generally informed taxpayers 

that mortgage interest deductions are subject to limits. Even though the 

guidance was generally sufficient, Schedule A does not explicitly mention 

the limitations. As shown in appendix II, Schedule A, line 10 asks 

taxpayers for the “Home mortgage interest and points reported to you on 

Form 1098.” Sometimes, as when an acquisition loan exceeds $1 million, 

this wording could be problematic because a taxpayer or preparer would 

need to look beyond the Form 1098 to determine the proper line 10 

amount.17 Using the same amount of space on Schedule A as now, line 10 

could easily be revised to mention limitations by deleting “reported to you” 

and using wording such as “Unless limited, home mortgage interest and 

points on Form 1098.”18 Another way to revise Schedule A would be to 

add something about mortgage interest deduction limitations to the 

margin near line 10. 

IRS’s Guidance to 

Taxpayers and 

Training Materials for 

Examiners Did Not 

Indicate the Range of 

Possible Mortgage 

Interest Deduction 

Situations 

Other possibilities for changing Schedule A to highlight limitations also 

exist, but would entail tradeoffs. For example, a check box could be added 

to the Schedule asking taxpayers if either the $1 million or the $100,000 

limitation applies to their loans. Making such a change not only would help 

taxpayers preparing their own returns but also might prompt paid 

preparers to more thoroughly interview their clients. However, with the 

mortgage interest deduction, these types of changes would add some 

 

17It is unclear how many taxpayers are affected by the $1 million debt limit. 

18Although (1) a Schedule A note near line 10 says to “See page A-5” of the instructions, (2) 

Form 1098 has an asterisk saying that the Form’s interest amount might not be fully 

deductible, and (3) most taxpayers might not be affected by the limitations, changing the 

wording on Schedule A could enhance compliance. 

Page 20 GAO-09-769 Mortgage Interest Deduction 
burden to taxpayers whose deductions are not affected by the debt limits. 

The effectiveness of such change is also unclear. 

Taxpayers might not read IRS guidance when preparing returns. To 

counter this possibility but also be mindful of preparation, mailing, and 

taxpayer service costs involved, IRS could test whether corresponding 

with some taxpayers would cost-effectively reduce misreporting. Added 

outreach—through seminars or communications with stakeholders such 

as paid preparers, tax return software providers, and industry groups—

could communicate key rules and common mistakes and be targeted to 

taxpayers, such as those reporting the deduction above a certain level. 

Sending correspondence directly to taxpayers also could help inform paid 

preparers of rules and common mistakes because the taxpayers would 

likely share it with their preparers, according to representatives of the tax 

return preparation industry.19 IRS has used outreach programs on 

mortgage interest deductions in recent years. For instance, IRS’s tax tips 

covered deducting refinancing costs. 

IRS’s guidance on the acquisition debt limit is inconsistent with a prior tax 

court ruling. Currently, Publication 936 guides the taxpayer to treat any 

qualified mortgage debt above the $1 million acquisition debt limit as 

home equity debt subject to the $100,000 limit, regardless of the loan’s use. 

In practice, this means that the taxpayer can deduct the interest on up to 

$1.1 million in acquisition debt (treating the amount above $1 million as 

home equity debt even if used to acquire the home). However, a 1997 U.S. 

Tax Court case ruled that the acquisition debt limit is $1 million and no 

additional deduction can be taken above the $1 million limit unless the 

taxpayer truly has home equity debt.20 One tax software company official 

cited the 1997 case as support for the company’s decision to change the 

guidance in its software to allow interest deductions only up to $1 million 

in acquisition debt, rather than follow the guidance in Publication 936. In 

2008, IRS Chief Counsel began reviewing the inconsistency in the debt 

limit allowances. However, a completion date for this work is uncertain. 

 

19IRS could tell taxpayers that (1) a lack of knowledge about mortgage interest deduction 

limitations has come to its attention, (2) they should learn if the limitations apply to them 

and if they have been compliant, (3) they should amend returns if warranted, and (4) IRS 

will spot-check some taxpayers to ensure compliance. To be credible, IRS would actually 

need to check some returns. If this approach were considered too onerous on the public, 

communication with taxpayers and practitioners could be strictly prospective, providing 

guidance on what to consider when filing the next return. 

20Pau v. Commissioner, T.C. Memo 1997-43. 

Page 21 GAO-09-769 Mortgage Interest Deduction 
Until IRS completes its determination, taxpayers will calculate their 

deductions using different debt limits depending on whether they, their tax 

preparers, or their tax software follow the guidance in Publication 936 or 

the tax court interpretation. Depending on IRS’s determination, some 

taxpayers may not be optimizing their deduction or IRS could be losing 

revenue from taxpayers overdeducting. 

IRS Examiner Guidance 

and Training Materials 

Addressed Mortgage 

Interest Deduction 

Limitations but Lacked 

Instructive Examples of 

Some Relevant Situations 

IRS’s examiners’ guidance and training materials included information for 

identifying and calculating home-equity and the acquisition-debt 

limitations. Overall, examiners we interviewed were satisfied with training 

and guidance on the mortgage interest deduction. 

However, IRS’s guidance and training materials did not cover problems 

that may arise in some real-life situations. For example, the guidance does 

not mention a problem that an examiner said she commonly found: 

taxpayers owning a third home, waiting to sell one of their first two, and 

deducting the interest paid on all three. Neither does the guidance address 

situations that tax professionals described as challenging for IRS to 

enforce, such as multiple refinancings, mortgages, or home equity lines of 

credit.21 The absence of such examples could impede examiners who do 

not deal with mortgage interest deduction issues regularly. An IRS training 

official told us that updating training materials with relevant examples 

could be done easily. 

Also, IRS’s examiner training materials reflect the taxpayer guidance with 

regard to the allowable acquisition debt limit. For example, according to 

one IRS training exercise, taxpayers could deduct interest on up to $1.1 

million in mortgage debt even if they used the $1.1 million just to acquire a 

home, contradicting the 1997 tax court ruling, discussed above. The 

difference may lead examiners to inconsistently calculate the tax owed, 

because some may calculate the acquisition debt limit as $1 million based 

on the tax court determination and others may allow deductions on up to 

$1.1 million as instructed by the training. As previously mentioned, IRS 

Chief Counsel’s office is reviewing the inconsistency between the IRS 

guidance and the tax court ruling. IRS officials said that they have 

 

21Taxpayers with home-based businesses also have complex returns when mortgage 

interest payment deductions appear partly on Schedule A and partly on a business return 

like Schedule C. 

Page 22 GAO-09-769 Mortgage Interest Deduction 
procedures to ensure that once the review is complete, examiners will be 

told of any clarification. 

The three companies’ tax preparation software for individuals that we 

analyzed differed from each other in how they treated the limitations on 

the amount of debt for which interest can be deducted.22 These software 

packages were among the most widely used by individuals.23 One 

company’s initial software screen containing mortgage interest deduction 

instructions mentioned possible deduction limitations, sending users to 

Publication 936 for calculations. One of the other companies made 

changes to its mortgage interest deduction displays in its 2008 version 

after considering our input on its 2007 version. These changes give more 

prominence to the deduction limitations and how Publication 936 may be 

used for calculations. 

Tax Software Differed 

in the Ease of 

Navigating Mortgage 

Interest Deduction 

Instructions 

The third company’s on-line software had information on the limitations, 

but users would not find this information unless they looked under 

“frequently asked questions.” This software also led the user to take 

amounts directly off Form 1098. For 2008, the software added a question 

to its frequently asked questions area about what taxpayers should do if 

interest and points exceeded the amount they could deduct. If taxpayers 

were to click on this question, they would find information about the 

limitations and the calculation needed. 

IRS does not know how frequently software packages are associated with 

misreporting. Such information could help IRS in its compliance efforts. 

We recently recommended that IRS require software companies to include 

a software identification number that specifically identifies the software 

 

22In 2007, over 39 million (or 28 percent) of the approximately 138 million individual 

income tax returns filed were prepared by individuals using tax software. 

23We limited our data analysis to the top three software companies—TaxACT, TaxCut, and 

TurboTax—because they account for 88 percent of all returns filed electronically by 

individuals and accepted by IRS. We also reviewed several tax software packages for paid 

preparers. However, unlike the software for the general public, these programs are not 

designed to lead users through different calculations. Instead the preparer software is 

designed for those with professional expertise. 

Page 23 GAO-09-769 Mortgage Interest Deduction 
package used to prepare tax returns. IRS plans to implement a software 

identification system in October 2009.24 

Because IRS has little information on taxpayers’ mortgage debts, it cannot 

easily detect when taxpayers are not complying with the deduction limits. 

Instead, to ensure taxpayer compliance with the statutory requirements, 

IRS must conduct examinations that are more costly to use than other 

enforcement methods, such as a matching program. The absence of 

specific information about the reasons for noncompliance also prevents 

IRS from making efficient decisions on how to select cases for 

examination. Simultaneously, the complexity of mortgage interest 

deduction rules creates problems with some taxpayers trying to comply. 

These problems are compounded by an inconsistency between IRS 

guidance and a tax court ruling on acquisition debt limits. Because the 

limits causing complexity are written in law, statutory changes may be the 

most direct way to address the challenges of administering the deduction 

and alleviate the compliance problems. However, consideration of 

statutory changes was beyond the scope of this report. Nonetheless, 

within the current statutory framework, opportunities exist for IRS to 

mitigate some of the problems we identified. 

We are making seven recommendations. Specifically, we recommend that 

the Commissioner of Internal Revenue 

• revise NRP’s case selection system so that a tax return’s mortgage 

interest deduction is not automatically excluded as an examination 

issue if it matches information reported on Form 1098; 

Conclusions 

Recommendations for 

Executive Action 

• revise Form 1098 to require third parties to provide information on 

mortgage balances, the address of a home securing a mortgage, and an 

indicator of whether the mortgage is for a current year refinancing; 

• investigate whether using information from private sources would be 

productive in detecting mortgage interest noncompliance, especially 

for home equity debt; 

 

24GAO, Tax Administration: Many Taxpayers Rely on Tax Software and IRS Needs to 

Assess Associated Risks, GAO-09-297 (Washington, D.C.: Feb. 25, 2009). 

Page 24 GAO-09-769 Mortgage Interest Deduction 
• revise the wording on Schedule A to clearly state that the mortgage 

interest deduction is subject to limitations; 

• conduct a test to evaluate whether mortgage interest deduction-related 

outreach programs to taxpayers and tax return preparers could be a 

cost-effective way to reduce noncompliance; outreach might include 

sending correspondence covering key rules and common mistakes or 

promoting seminars on common types of misreporting; 

• set a date to complete the Chief Counsel determination on whether the 

acquisition debt limit is $1 million or $1.1 million when used in 

combination with the home equity debt limit; and 

• revise examiner training materials by adding examples cited as 

common problems by auditors and paid tax return preparers, such as 

those involving multiple homes or home-based businesses, and after 

the Chief Counsel’s final determination on the acquisition limit, revise 

examiner training and the worksheet in guidance to reflect the project’s 

outcome. 

We received written comments from the Internal Revenue Service on July 

23, 2009 (for the full text of the comments, see app. VIII). IRS agreed with 

five of our recommendations and agreed to study the other two. It 

acknowledged that without information about taxpayers’ mortgage debts, 

it cannot easily detect taxpayer noncompliance with the mortgage interest 

deduction limits. IRS also said that the absence of information about 

noncompliance prevents it from efficiently deciding how to select cases 

for review and that the complexity of the rules causes problems for some 

taxpayers. Regarding our recommendation to revise Form 1098 to include 

more information on taxpayer mortgages, IRS agreed to study the issue, 

saying it does not have enough data to support revisions at this time. 

Because IRS acknowledged in its comments that it does not have 

information about taxpayers’ mortgage debts to easily detect 

noncompliance, we believe that our recommended revisions to Form 1098 

would be cost-effective ways to provide IRS with additional useful 

information to help it detect noncompliance. Concerning our 

recommendation to conduct a test to evaluate whether mortgage interest 

deduction-related outreach programs could be a cost-effective way to 

reduce noncompliance, IRS said it will study the feasibility of such a test. 

Agency Comments 

and Our Evaluation 

As agreed with your office, unless you publicly announce its contents 

earlier, we plan no further distribution of this report until 30 days after its 

Page 25 GAO-09-769 Mortgage Interest Deduction 
date. At that time, we will send copies to the Secretary of the Treasury, the 

Commissioner of Internal Revenue, and other interested parties. This 

report will also be available at no charge on GAO’s Web site at 

http://www.gao.gov. 

For further information regarding this report, please contact me at (202) 

512-9110 or at whitej@gao.gov. Contacts for our Offices of Congressional 

Relations and Public Affairs may be found on the last page of this report. 

Individuals making key contributions to this report may be found in 

appendix IX. 

James R. White 

Director, Tax Issues 

Strategic Issues Team 

Page 26 GAO-09-769 Mortgage Interest Deduction 
Appendix I: Scope and Methodology 

Page 27 GAO-09-769 Mortgage Interest Deduction 

Appendix I: Scope and Methodology 

To provide information on how IRS detects taxpayers’ noncompliance 

with the home mortgage interest deduction rules and what IRS knows 

about the extent of noncompliance and to identify problems, if any, that 

taxpayers face in attempting to comply with the deduction and describe 

IRS’s challenges in detecting mortgage interest deduction noncompliance, 

we 

• reviewed IRS documents and interviewed agency officials to determine 

how IRS checks taxpayers’ compliance with deduction rules and if 

there were issues affecting its ability to detect noncompliance. This 

included reviewing information on IRS’s compliance initiative projects 

that focused on the mortgage interest deduction and interviewing IRS 

examiners from four widely dispersed parts of the country who were 

involved in the projects. The examiners were selected by IRS officials 

for their mortgage interest deduction expertise; 

• obtained information from IRS’s 2001 National Research Program 

(NRP) compliance study of individual taxpayers and data for 2006 

through 2008 from its Examination Operational Automation Database 

(EOAD) and Audit Information Management System (AIMS) to 

determine examination results about individual taxpayers’ compliance 

with mortgage interest deduction rules; and 

• conducted a literature search of relevant tax publications and 

interviewed non-government experts to enhance our understanding of 

mortgage interest deduction compliance issues affecting taxpayers and 

IRS. 

To assess options to give IRS more information to enforce compliance 

with mortgage interest deduction rules, we surveyed literature and 

interviewed industry representatives about third-party information 

reporting options that would give IRS useful information to improve its 

ability to enforce mortgage interest deduction rules while minimizing 

burden on third parties. We discussed the options, including their pros and 

cons, with industry representatives from organizations such as the 

Mortgage Bankers Association and the American Institute of Certified 

Public Accountants and with others such as scholars who have expertise 

in this area. We also met with IRS officials to obtain their views on the 

feasibility of the options to improve compliance. Consideration of 

statutory changes was beyond the scope of the request. 

To determine if IRS could benefit from using private sector information to 

detect noncompliance with home equity rules, we obtained statistical 

information about home equity loans, home equity lines of credit, and 
Appendix I: Scope and Methodology 

cash-out refinancings that have exceeded $100,000 from SMR Research, 

one of several companies that compile and analyze mortgage data. 

According to its Web site, SMR Research is the nation’s largest publisher 

of industry and market research studies on the home mortgage business, 

home equity lending, and other consumer loan subjects. We did not study 

the information of any of the other company with extensive mortgage data 

because our purpose was only to gather data on the type of information 

that might be available from private sector sources that potentially could 

benefit IRS in detecting home equity noncompliance. To assess the 

reliability of the SMR Research data, we discussed the controls over the 

database with a responsible company official and reviewed documentation 

of the controls used to gather the data. We also used information from the 

American Housing Survey for the United States: 2007, prepared by the 

U.S. Department of Housing and Urban Development and the U.S. Census 

Bureau, to confirm the reasonableness of SMR Research information. We 

found the SMR database reliable for our purposes. 

To find whether IRS’s guidance to taxpayers provided enough information 

to properly calculate the mortgage interest deduction, we reviewed the 

guidance to determine whether it mentioned the limitations prominently, 

i.e., whether the limitations were mentioned directly as opposed to the 

user being directed to another place. 

To determine whether IRS’s examiners’ training and guidance provided 

enough information on properly calculating the mortgage interest 

deduction, we compared examiner training and guidance documents with 

IRS publications and instructions on mortgage interest deductions, as well 

as the applicable tax laws. 

To describe how tax return preparation software programs and IRS’s Free 

File program handle the mortgage interest deduction, we checked how the 

three software packages used by 88 percent of individuals filing 

electronically treated the debt limitations. We did this by logging on to the 

software and reviewing the screens pertaining to the home mortgage 

interest deduction. We also discussed our findings with company officials. 

We reviewed tax year 2007 versions of each of the software packages and 

included the versions used for IRS’s Free File program. Our results are 

limited to the versions of the software packages we reviewed and cannot 

be generalized to others. Free File offers free federal tax return 

preparation and electronic filing services through these companies and 

others. In addition, we reviewed documentation showing how software 

widely used by paid tax return preparers for millions of taxpayers 

throughout the country handles the mortgage interest deduction. 

Page 28 GAO-09-769 Mortgage Interest Deduction 
Appendix I: Scope and Methodology 

In addition, to respond to your request, we analyzed data from IRS’s 

Statistics of Income (SOI) Division and the Compliance Data Warehouse 

(CDW) to compile information about year-to-year changes in taxpayers’ 

mortgage interest deductions and Form 1098 filings for tax years 2004 

through 2006.1

 Our analyses focused on the dollar amounts listed on 

Schedule A, line 10; whether mortgage interest deductions on Schedule A, 

line 10 matched Form 1098 amounts; frequency of paid preparer use by 

those claiming a Schedule A, line 10 deduction; loan account numbers; and 

amounts of mortgage interest deduction taken on forms other than 

Schedule A to which we had access, including Schedule C for sole 

proprietorship businesses, Schedule E for supplemental income and 

losses, Schedule F for farms, and Form 4835 for farm rental income and 

expenses.2

 For part of our analysis, we used the SOI database to identify a 

panel of taxpayers from tax year 2004 and then collected tax information 

about them from the CDW database for tax years 2004 through 2006. These 

analyses are in appendix V, and margins of error for these tables are 

provided in appendix VI. 

We found the IRS databases we used—NRP, EOAD, AIMS, SOI, and 

CDW—reliable for the purposes of this report. NRP, AIMS, SOI and CDW 

are also data sources that we have tested for previous engagements. For 

EOAD, we reviewed documentation on database procedures, interviewed 

IRS officials, ran electronic checks, and compared output to other 

available information for reasonableness purposes. 

We conducted this performance audit from May 2008 through July 2009 in 

accordance with generally accepted government auditing standards. Those 

standards require that we plan and perform the audit to obtain sufficient, 

appropriate evidence to provide a reasonable basis for our findings and 

conclusions based on our audit objectives. We believe that the evidence 

obtained provides a reasonable basis for our findings and conclusions 

based on our audit objectives. 

 

1

The SOI analysis discussed here was not part of the SOI statistics presented in table 2, 

which includes data obtained from published SOI materials. 

2

Form 8829, Expenses for Business Use of Your Home, also can be used to report a 

mortgage interest deduction, but mortgage interest reported on this form is not included in 

the SOI database and consequently was not part of our analysis. 

Page 29 GAO-09-769 Mortgage Interest Deduction 
Appendix II: Schedule A, Itemized Deductions

Page 30 GAO-09-769 Mortgage Interest Deduction 

Appendix II: Schedule A, Itemized 

Deductions 

Figure 3: Internal Revenue Service Schedule A on Which the Home Mortgage Interest Deduction Is Taken 

Source: IRS.

Mortgage interest 

deductions
Appendix III: Examination Results Involving Appendix III: Examination Results Involving Mortgage Interest Deductions 

Mortgage Interest Deductions 

The following table compares examination results of IRS’s compliance 

initiative projects (CIP) on the mortgage interest deduction with results 

from its routine examinations (non-CIP). 

Table 4: Results of IRS’s Fiscal Year 2008 Examinations of Schedule A, Line 10 for 

CIP and non-CIP Examinations 

Examination result First CIP Second CIP Non-CIP 

Type of change to the line 10 deduction Number of examinations 

 Decrease to the line 10 deduction 1,012 6,982 11,971

 Increase to the line 10 deduction 27 134 14,279

 No line 10 change 119 890 6,306

 Total 1,158 8,006 32,556

Type of change to the tax amount Number of examinations 

 Increase to the tax amount 994 6,648 26,625

 Decrease to the tax amount 42 233 2,748

 No tax change 122 1,125 3,183

 Total 1,158 8,006 32,556

Median change to the line 10 deduction or 

to the tax amount Dollar amount of the median change 

 Median decrease to the line 10 deduction $29,359 $27,940 $6,430

 Median increase to the tax amount $7,673 $8,012 $4,612

Source: GAO analysis of IRS data. 

Note: This table includes only examinations done by revenue agents or tax compliance officers. 

Page 31 GAO-09-769 Mortgage Interest Deduction 
Appendix IV: Examples Illustrating Mortgage Appendix IV: Examples Illustrating Mortgage Interest Deduction’s Complexity 

Interest Deduction’s Complexity 

As shown in the examples in this appendix, to determine the amounts of 

mortgage interest that is deductible on Schedule A, a taxpayer or his or 

her tax return preparer might need to follow many steps. First, the 

taxpayer must find all his or her records pertaining to the property’s 

acquisition and determine if the October 13, 1987, cutoff date applies, then 

locate records of refinancing arrangements affecting acquisition debt, and 

calculate the appropriate average annual balance. Second, the taxpayer 

must determine home equity indebtedness, properly tracking, for instance, 

the use of proceeds from home equity lines of credit, and determining 

average balances and home equity amounts not deductible for AMT 

purposes. Third, the taxpayer must know when loan proceeds finance 

business use of the home, a partly rented home, or personal, business, 

investment, or municipal bond expenditures because how the loan 

proceeds are used determines the deductibility of the loan interest on the 

tax return. 

The American Institute of Certified Public Accountants gave us details of 

the following scenario in which married homeowners refinanced their 

house: 

• In 1990, a married couple borrowed $150,000 to buy a house. 

• By January 1, 2008, they had made principal payments of $50,000, 

leaving an acquisition debt of $100,000. 

• On January 1, 2008, their house’s fair market value was $500,000, and 

they refinanced their original loan for $400,000. 

• The new $400,000 mortgage would be allocated as follows: 

• The first $100,000 would be considered home acquisition debt, and 

the interest on it would be deductible for the regular tax and for the 

AMT. 

• The next $100,000 would be considered home equity debt, equal to 

the home equity limitation and, therefore, deductible for the regular 

tax but not for AMT unless it was used to acquire, construct, or 

improve a main or second home. 

• The last $200,000 would be subject to “interest tracing” rules, with 

deductibility depending on how the money was used—for instance, 

if used for personal or municipal bond purposes, the interest would 

not be deductible. However, if used for business or investment 

purposes, the interest may be deductible. 

Page 32 GAO-09-769 Mortgage Interest Deduction 
Appendix IV: Examples Illustrating Mortgage 

Interest Deduction’s Complexity 

The example would have been more complicated if not for the following 

simplifying assumptions that we made: 

• The couple owned only one house and never borrowed money to 

improve it. 

• They bought it after the October 13, 1987, the grandfather date when 

rules changed regarding the amount of acquisition debt for which 

interest is deductible. 

• This was the first time they refinanced the house. 

• The refinancing was done on the first day of the year and $1,000 in 

principal was repaid each month, making monthly mortgage balances 

easily calculated throughout the year.1

• They had no home equity loans other than a home equity part of the 

refinancing and had not used a home equity line of credit, the use of 

whose proceeds they would have had to have tracked. 

• They never used the house for business or rented any part of it. 

We used the facts and assumptions of this example to complete the 13 

steps in table 5, which is patterned after a worksheet in Publication 936. 

Table 5 tracks the path taxpayers would follow in figuring their deductible 

home mortgage interest. 

 

1

Publication 936 also has an example of consistent principal payments per month, but we 

recognize that principal payments often differ from month to month. 

Page 33 GAO-09-769 Mortgage Interest Deduction 
Appendix IV: Examples Illustrating Mortgage 

Interest Deduction’s Complexity 

Table 5: IRS Worksheet to Figure Home Mortgage Interest 

# Computation action 

Dollar 

amount Comments 

Part I—Qualified loan limit

1 Enter average balance of grandfathered 

debt 

$0 The simplifying assumption was that the house was not bought 

before October 14, 1987 

2 Enter average balance for all your home 

acquisition debt 

100,000 The taxpayers had to find records of their original debt and how 

much principal they had repaid at the time of the refinancing; if 

there had been second and third mortgages, previous 

refinancings, additions to the home, or seller-financed mortgages 

with no financial institution involved, they would have to be 

considered; under average balance rules for refinancings that 

include home acquisition and home equity components, principal 

payments for the refinancing had not yet reduced the $100,000 

home acquisition debt 

3 Enter $1 million ($500,000 if married 

filing separately) 

1,000,000 The taxpayers were filing a joint return 

4 Enter the larger of #1 or #3 1,000,000

5 Add #1 and #2 100,000

6 Enter the smaller of #4 or #5 100,000

7 Enter the smaller of $100,000 ($50,000 

if married filing separately) or homes’ 

fair market value minus acquisition debt 

minus grandfathered debt ($500,000 - 

$100,000 – 0 = $400,000) 

100,000 The taxpayers were filing a joint return; they would determine the 

fair market value and retain it for use in any future years’ 

calculations. 

8 Add #6 + #7 = qualified loan limit 200,000

Part II—Deductible home mortgage interest

9 Enter total of average balances of all 

mortgages on all qualified homes 

($400,000 + $388,000)/2 = $394,000; 

continue with this table if #8 is less than 

#9 

394,000 Each month, the same amount of the principal—$1,000—was 

repaid for the only house involved; this calculation would be more 

complicated if the refinancing had occurred after January 1, or if 

another mortgage also were incurred, especially since it likely 

would have begun at a different time of the year 

10 Enter interest you paid, including the 

amount from Form 1098 

20,000 The amount from Form 1098 is the amount that some taxpayers 

might enter directly onto Schedule A 

11 Divide #8 by #9, rounding to 3 places .508

12 Multiply #10 by #11 and enter result 

here and on Schedule A 

10,160 This is the home mortgage interest deduction for now, but where 

home equity debt is involved, there could be a home mortgage 

interest adjustment that would have to be calculated for AMT 

purposes 

Page 34 GAO-09-769 Mortgage Interest Deduction 
Appendix IV: Examples Illustrating Mortgage 

Interest Deduction’s Complexity 

# Computation action 

Dollar 

amount

 

Comments 

13 Subtract #12 from #10 9,840 This is the portion of your home mortgage interest that is not 

deductible on Schedule A. Other rules might have to be consulted 

on the deductibility of this interest, depending on whether the 

applicable loan proceeds were used, for instance, for a trade or 

business, an investment, a municipal bond, personal purposes, or 

a combination of these; if the taxpayer used his home for business 

or rented part of it out, mortgage interest could appear in different 

parts of the tax return 

Source: Department of the Treasury, IRS, Publication 936: Home Mortgage Interest Deduction: For Use in Preparing 2008 Returns; 

GAO analysis. 

A professional tax preparer also gave us the following example to 

illustrate the complexity of the mortgage interest deduction. This example 

may be atypical but reflects a more complicated case than the previous 

example. 

The client had more than one home, a mortgage greater than $1 million, a 

refinancing, and home equity debt. In this case, the practitioner said that it 

took over 4 hours of tracing transactions to calculate the acquisition and 

home equity debt for one house, using an Excel spreadsheet to enter 

amounts from closing statements for each of multiple refinancings. Home 

equity debt had to be tracked separately because interest on allowable 

home equity debt is generally not deductible for AMT purposes unless the 

proceeds are used to buy, build, or improve a home. Acquisition debt after 

refinancing had to only include the acquisition debt part of the previous 

loan and closing costs. A deductible interest spreadsheet had to consider 

beginning and ending loan balances, how loan proceeds were originally 

used, and total interest paid. 

Page 35 GAO-09-769 Mortgage Interest Deduction 
Appendix V: Descriptive Data on Home 

Mortgage Interest Deduction Claims and Appendix V: Descriptive Data on Home Form 1098 Filings 

Mortgage Interest Deduction Claims and 

Form 1098 Filings 

This appendix presents analyses of Statistics of Income (SOI) Division and 

Compliance Data Warehouse (CDW) data focusing on Schedule A, line 10 

deductions and Form 1098 filings. Tables 6 through 12 use a SOI-derived 

panel of taxpayers from 2004 through 2006, combined with CDW data on 

Form 1098 filings, and table 13 uses SOI data exclusively. 

Table 6 shows that for returns reporting a Schedule A, line 10 deduction 

for all three years of the study period, about half had mortgage interest 

from one Form 1098. For example, in 2006, 42.6 percent of taxpayers 

reporting a mortgage interest deduction had one Form 1098, totaling about 

$126.5 billion in Schedule A, line 10 deductions. Table 6 also shows that 

some taxpayers reported a mortgage interest deduction on Schedule A, 

line 10. This might mean that the taxpayer improperly filled out line 10 on 

Schedule A or that IRS had not received a corresponding Form 1098 for 

that particular taxpayer. The number of Form 1098 filings does not reflect 

the number of homes a taxpayer has because, for example, taxpayers 

would receive multiple Form 1098 filings in a given year if they sold a 

home or if their existing mortgage was sold in the secondary market. The 

margins of error for the tables in this appendix appear in app. VI. 

 

 

Page 36 GAO-09-769 Mortgage Interest Deduction 
Appendix V: Descriptive Data on Home 

Mortgage Interest Deduction Claims and 

Form 1098 Filings 

Table 6: Number and Dollar Total of Schedule A, Line 10 Deductions per Number of Form 1098 Filings, 2004 through 2006 

2004 

Number of Form 1098 filings 

Number of tax returns 

(millions) Percentage

Line 10 amounts for tax 

returns (billions of dollars) Percentage

0 1.5 4.1 $9.3 3.2

1 16.8 46.1 114.3 39.3

2 11.0 30.3 97.5 33.5

3 4.2 11.5 42.2 14.5

4 or more 2.9 7.9 27.6 9.5

Total 36.5 100.0 $290.9 100.0

2005 

Number of Form 1098 filings 

Number of tax returns 

(millions) Percentage

Line 10 amounts for tax 

returns (billions of dollars) Percentage

0 1.4 3.7 $8.9 2.7

1 16.2 43.4 114.0 34.9

2 11.7 31.3 111.0 34.0

3 4.6 12.4 52.2 16.0

4 or more 3.5 9.3 40.1 12.3

Total 37.3 100.0 $326.2 100.0

2006 

Number of Form 1098 filings 

Number of tax returns 

(millions) Percentage

Line 10 amounts for tax 

returns (billions of dollars) Percentage

0 1.4 3.7 $10.3 2.7

1 16.4 42.6 $126.5 33.7

2 12.6 32.6 135.7 36.1

3 4.7 12.1 58.9 15.7

4 or more 3.4 8.9 44.2 11.8

Total 38.5 100.0 $375.5 100.0

Source: GAO analysis of IRS data. 

Note: Percentages may not add to 100 percent because of rounding. 

Table 7 breaks down the pattern of Schedule A, line 10, deduction 

amounts compared with the number of Form 1098 filings. For example, in 

2006, 75 percent of taxpayers with two Form 1098 filings had deduction 

amounts of $14,325 or less. 

Page 37 GAO-09-769 Mortgage Interest Deduction 
Appendix V: Descriptive Data on Home 

Mortgage Interest Deduction Claims and 

Form 1098 Filings 

Table 7: Distribution of Schedule A, Line 10 Deductions in Select Percentiles per Number of Form 1098 Filings, 2004 through 

2006 

2004 

Schedule A, line 10 deduction distribution by certain percentiles in dollars

Number of Form 1098 filings 5th 10th 25th 50th 75th

0 $184 $435 $2,262 $5,248 $8,570

1 1,265 2,158 3,905 6,093 8,839

2 2,705 3,678 5,568 8,121 11,959

3 3,494 4,598 6,788 9,986 14,978

4 or more 4,378 5,883 8,405 12,520 19,014

2005 

Schedule A, line 10 deduction distribution by certain percentiles in dollars

Number of Form 1098 filings 5th 10th 25th 50th 75th

0 $243 $505 $2,271 $5,140 $8,691

1 1,342 2,217 3,994 6,211 9,041

2 2,900 3,917 5,908 8,666 12,648

3 4,287 5,543 7,743 11,229 16,682

4 or more 5,704 6,875 9,819 14,630 22,597

2006 

Schedule A, line 10 deduction distribution by certain percentiles in dollars 

Number of Form 1098 filings 5th 10th 25th 50th 75th

0 $249 $490 $2,638 $5,692 $9,555

1 1,435 2,379 4,229 6,657 9,860

2 3,170 4,366 6,475 9,524 14,325

3 4,589 5,825 8,298 12,372 18,957

4 or more 5,659 7,533 10,766 16,654 26,085

Source: GAO analysis of IRS data. 

Table 8 shows the results of comparing Schedule A, line 10, deduction 

amounts on tax returns to amounts reported to IRS by third parties on 

Form 1098. As the table shows, about 65 percent to 67 percent of the 

comparisons resulted in a match in all 3 years. However, in some 

situations, our analysis showed that taxpayers’ deductions also were 

greater or less than the amounts on Forms 1098. Over the three-year 

period, 8.2 percent to 11.1 percent of tax returns’ deductions exceeded the 

Form 1098 amount. This can occur legitimately when, for example, a 

property is co-owed and one of the owners claiming the deduction does 

Page 38 GAO-09-769 Mortgage Interest Deduction 
Appendix V: Descriptive Data on Home 

Mortgage Interest Deduction Claims and 

Form 1098 Filings 

not receive a Form 1098. It can also occur because of taxpayer or Form 

1098 filing errors. Deductions can be less than the Form 1098 amounts 

when taxpayers’ debts have exceeded the deduction limits or by error. 

Table 8: Results of Comparing Total Schedule A, Line 10 Deduction Amounts to Amounts Reported on Form 1098, 2004 

through 2006 

2004 

Results of comparison 

Total number of tax 

returns (millions) Percentage

Schedule A, line 10 

amount (billions of 

dollars) 

Difference between 

Form 1098 amounts 

and line 10 amounts 

(millions of dollars)

Match 23.8 65.3 $198.5 -

Deduction exceeds Form 1098 amount 4.1 11.1 41.6 

$9,229.0 

Deduction less than Form 1098 amount 7.1 19.4 41.4 14,962.2 

No Form 1098 1.5 4.1 9.3 9,280.3 

Total 36.5 100.0 $290.9 - 

2005 

Results of comparison 

Total number of tax 

returns (millions) Percentage

Schedule A, line 10 

amount (billions of 

dollars) 

Difference between 

Form 1098 amounts 

and line 10 amounts 

(millions of dollars)

Match 24.6 65.9 $224.7 -

Deduction exceeds Form 1098 amount 3.5 9.3 38.0 $7,452.0 

Deduction less than Form 1098 amount 7.9 21.1 54.6 21,240.5 

No Form 1098 1.4 3.7 8.9 8,903.2 

Total 37.3 100.0 $326.2 - 

2006 

Results of comparison 

Total number of tax 

returns (millions) Percentage

Schedule A, line 10 

amount (billions of 

dollars) 

Difference between 

Form 1098 amounts 

and line 10 amounts 

(millions of dollars)

Match 25.8 67.0 $263 -

Deduction exceeds Form 1098 amount 3.2 8.2 39.2 $7,033.0 

Deduction less than Form 1098 amount 8.1 21.1 63.0 26,641.5 

No Form 1098 1.4 3.7 10.3 10,300.0 

Total 38.5 100.0 $375.5 -

Source: GAO analysis of IRS data. 

Note: Percentages may not add to 100 percent because of rounding. 

Page 39 GAO-09-769 Mortgage Interest Deduction 
Appendix V: Descriptive Data on Home 

Mortgage Interest Deduction Claims and 

Form 1098 Filings 

Table 9 shows both the distribution of Schedule A, line 10 deduction 

amounts and the distribution of the differences between Schedule A, line 

10 and Form 1098 statements filed for taxpayers who reported a Schedule 

A, line 10 deduction. For example, in 2006, the median (50th percentile) 

difference between Form 1098 and Schedule A amounts for taxpayers 

whose deduction exceeded the Form 1098 amount was $727. 

Table 9: Percentile Distributions for Schedule A, Line 10 Amounts Compared with Form 1098 Amounts and the Difference 

between Schedule A, Line 10 Amounts and Form 1098 Amounts, 2004 through 2006 

2004 

Percentiles in dollars 

Output of comparison 5th 10th 25th 50th 75th

Match $1,725 $2,778 $4,651 $7,129 $10,544

Deduction exceeds Form 

1098 amount 

2,506 3,501 5,614 8,740 13,105

Deduction less than Form 

1098 amount 

1,874 2,872 4,686 7,523 11,777

Schedule A, line 10 

amount 

No Form 1098 184 435 2,262 5,248 8,570

Match . . . . .

Deduction exceeds Form 

1098 amount 

30 87 292 669 2,817

Deduction less than Form 

1098 amount 

49 142 559 1,428 3,716

Difference between 

Schedule A, line 10 and 

Form 1098 amounts 

No Form 1098 184 435 2,262 5,248 8,570

2005 

Percentiles in dollars 

Output of comparison 5th 10th 25th 50th 75th

Match $1,926 $2,981 $4,970 $7,588 $11,427

Deduction exceeds Form 

1098 amount 

2,333 3,494 5,659 8,834 13,845

Deduction less than Form 

1098 amount 

1,999 3,129 5,379 8,511 13,400

Schedule A, line 10 

amount 

No Form 1098 243 505 2,271 5,140 8,691

Match . . . . .

Deduction exceeds Form 

1098 amount 

21 69 263 587 2,335

Deduction less than Form 

1098 amount 

70 215 694 1,761 4,314

Difference between 

Schedule A, line 10 and 

Form 1098 amounts 

No Form 1098 243 505 2,271 5,140 8,691

Page 40 GAO-09-769 Mortgage Interest Deduction 
Appendix V: Descriptive Data on Home 

Mortgage Interest Deduction Claims and 

Form 1098 Filings 

2006 

Percentiles in dollars 

Output of comparison 5th 10th 25th 50th 75th

Match $2,091 $3,200 $5,324 $8,245 $12,728

Deduction exceeds Form 

1098 amount 

2,754 3,891 6,193 9,918 15,722

Deduction less than Form 

1098 amount 

2,161 3,448 5,716 9,173 14,937

Schedule A, line 10 

amount 

No Form 1098 249 490 2,638 5,692 9,555

Match . . . . .

Deduction exceeds Form 

1098 amount 

17 76 287 727 2,708

Deduction less than Form 

1098 amount 

67 235 717 1,939 5,180

Difference between 

Schedule A, line 10 and 

Form 1098 amounts 

No Form 1098 249 490 2,638 5,692 9,555

Source: GAO analysis of IRS data. 

Note: No values are shown for matches between Form 1098 and Schedule A, line 10 amounts when 

the value was $3 or less, to account for rounding errors. 

Our analysis also examined the change in mortgage interest deduction 

amounts from 2004 through 2006, for those taxpayers who reported a 

deduction in all 3 years. Table 10 shows the amount of change from 2004 

to 2005 and then from 2005 to 2006. For example, the median (50th 

percentile) changes for tax returns that had increases from both 2004 to 

2005 and 2005 to 2006 were $1,496 and $1,691, respectively. 

Table 10: Year-to-Year Changes in Amount Deducted on Schedule A, Line 10, 2004 through 2006 

Percentile of change of line 10 deduction amounts in dollars Number of 

returns Year 5th 10th 25th 50th 75th

Increase all years 8,148,964 2004-2005 $103 $216 $584 $1,496 $3,550

2005-2006 134 272 694 1,691 4,157

Increase, then 2004-2005 90 170 480 1,378 3,946

lower 

5,586,917 

2005-2006 65 110 255 794 2,291

Lower, then 2004-2005 65 103 272 779 1,904

increase 

5,294,566 

2005-2006 99 193 509 1,399 3,743

Lower, all years 8,530,243 2004-2005 61 85 151 334 761

2005-2006 63 89 152 315 672

Source: GAO analysis of IRS data. 

Page 41 GAO-09-769 Mortgage Interest Deduction 
Appendix V: Descriptive Data on Home 

Mortgage Interest Deduction Claims and 

Form 1098 Filings 

Table 11 shows the comparison of the year-to-year change in the number 

of Forms 1098 taxpayers received with the dollar amount of change on 

Schedule A, line 10, for the corresponding years. Only those taxpayers 

with tax returns filed in all 3 years of our study are included in this 

analysis. For example, the table shows that 581,950 tax returns had a 

declining number of Form 1098 filings from both 2004 to 2005 and 2005 to 

2006 (“Down all years”). For those taxpayers, the dollar amount of their 

deductions declined by $2,471 from 2004 to 2005 for those at the 50th 

percentile and decreased by $1,834 from 2005 to 2006. An increase in 

deduction dollar amounts can occur when Form 1098 filings decreased, for 

example, as in the year after a taxpayer sells one of his two homes, and 

purchases a new home that has a larger mortgage interest deduction 

amount than the previous two homes combined. 

Table 11: Year-to-Year Changes in the Number of Form 1098 Filings, with Distribution of Change Amounts on Schedule A, 

Line 10, 2004 through 2006 

Number of Percentile distribution of change in dollar amounts 

returns Year 5th 10th 25th 50th 75th

Down all years 581,950 2004-2005 

2005-2006 112 210 685 1,834 4,752

Down, then up 1,374,241 2004-2005 136 270 627 1,608 4,011

2005-2006 122 244 743 2,000 5,040

Down, then the same 3,272,246 2004-2005 107 194 520 1,307 3,088

2005-2006 74 108 215 581 1,727

More, then fewer 3,499,626 2004-2005 113 241 683 1,822 4,594

2005-2006 121 233 646 1,731 4,358

Up all years 742,782 2004-2005 94 224 567 1,735 4,585

2005-2006 201 414 1,305 3,508 8,065

Up, then the same 1,791,402 2004-2005 92 173 514 1,328 3,154

2005-2006 95 187 477 1,386 3,702

Same, then fewer 1,362,878 2004-2005 82 161 501 1,370 3,589

2005-2006 92 166 487 1,268 3,293

Same, then up 2,959,900 2004-2005 65 93 211 559 1,591

2005-2006 89 172 535 1,530 3,823

Same, then the same 12,121,270 2004-2005 60 89 176 429 1,104

2005-2006 65 96 185 441 1,130

Source: GAO analysis of IRS data. 

Page 42 GAO-09-769 Mortgage Interest Deduction 
Appendix V: Descriptive Data on Home 

Mortgage Interest Deduction Claims and 

Form 1098 Filings 

Table 12 shows an analysis of Form 1098 by mortgage loan account 

numbers. We performed this analysis to show more precisely how 

frequently taxpayers deducted mortgage interest on the same loan from 

year to year, assuming the same loan number in different years referred to 

the same loan. For example, from 2004 and 2005, about 25 million 

taxpayers had one matching account number on their Forms 1098. The 

third chart shows taxpayers who had matching accounts throughout the 3-

year period. For example, 574,173 taxpayers had 3 matching account 

numbers on their Forms 1098 in 2004, 2005, and 2006. Taxpayers with zero 

matching account numbers likely means that they deducted interest on 

different loans in different years. 

Table 12: Numbers of Matching Loan Account Numbers on Forms 1098, 2004 

through 2006 

Account number matches, 2004-2005 Number of returns Percentage

0 12,937,920 28.0

1 24,779,618 53.6

2 7,081,903 15.3

3 1,005,476 2.2

4 or more 460,467 1.0

Account number matches, 2005-2006 Number of returns Percentage

0 11,002,815 23.8

1 24,773,661 53.5

2 8,625,659 18.6

3 1,228,589 2.7

4 or more 634,661 1.4

Number of matching account numbers in all 

years 

Number of returns Percentage

0 21,249,738 45.9

1 19,929,360 43.1

2 4,284,053 9.3

3 574,173 1.2

4 or more 228,059 0.5

Source: GAO analysis of IRS data. 

Note: Tables’ percentages may not add to 100 percent because of rounding. 

Page 43 GAO-09-769 Mortgage Interest Deduction 
Appendix V: Descriptive Data on Home 

Mortgage Interest Deduction Claims and 

Form 1098 Filings 

Table 13 shows the distribution of taxpayers’ mortgage interest deductions 

on Schedule A and on other schedules. Non-Schedule A interest 

deductions may relate to forms such as Schedule C for small business, 

Schedule E for rental property, and Schedule F for farming. 

Table 13: Number of Individual Tax Returns with Schedule A Mortgage Interest Deductions and Non-Schedule A Mortgage 

Interest Deductions, 2004 through 2006 

2004 2005 2006 

Mortgage interest deduction types 

Number of tax 

returns Percentage

Number of tax 

returns Percentage 

Number of 

tax returns Percentage

Only Schedule A 33,531,542 26.2 34,239,756 26.3 35,341,431 26.4

Only non-Schedule A 2,313,995 1.8 2,297,572 1.8 2,248,038 1.7

Schedule A and non-Schedule A 3,360,344 2.6 3,477,998 2.7 3,574,322 2.7

No mortgage interest 88,871,934 69.4 90,021,638 69.2 92,720,476 69.3

Total 128,077,815 100.0 130,036,964 100.0 133,884,266 100.0

Source: GAO analysis of IRS data. 

Note: Percentages may not add to 100 percent because of rounding. 

Page 44 GAO-09-769 Mortgage Interest Deduction 
Appendix VI: Margins of Error Tables for Appendix VI: Margins of Error Tables for Estimates in Appendix V 

Estimates in Appendix V 

The following tables provide the margins of error for the corresponding 

statistics reported in the previous appendix. For example, table 14 

corresponds with table 6 in app. V. 

Table 14: Margins of Error for Number and Dollar Total of Schedule A, Line 10 Deductions per Number of Form 1098 Filings, 

2004 through 2006 

2004 

Number of Form 1098 

filings 

Number of tax returns 

(millions) Percentage

Line 10 amounts for tax returns 

(billions of dollars)

0 a0.85 $0.78

1 a0.63 2.02

2 a0.58 2.38

3 a0.39 1.75

4 or more a 0.30 1.52

Total a a2.66

2005 

Number of Form 1098 

filings 

Number of tax returns 

(millions) Percentage

Line 10 amounts for tax returns 

(billions of dollars)

0 a 0.68 $0.61

1 a0.45 1.90

2 a 0.42 1.81

3 a0.29 1.52

4 or more a 0.24 1.53

Total a a2.47

2006 

Number of Form 1098 

filings 

Number of tax returns 

(millions) Percentage

Line 10 amounts for tax returns 

(billions of dollars)

0 a0.63% $0.72

1 a0.44 1.71

2 a0.42 2.15

3 a0.29 1.74

4 or more a 0.23 1.74

Total a a2.60

Source: GAO analysis of IRS data. 

a

The values of these margins are less than 0.01. 

Page 45 GAO-09-769 Mortgage Interest Deduction 
Appendix VI: Margins of Error Tables for 

Estimates in Appendix V 

Table 15: Margins of Error for Distribution of Schedule A, Line 10 Deductions in Select Percentiles per Number of Form 1098 

Filings, 2004 through 2006 

2004 

Schedule A, line 10 deduction distribution by certain percentiles in dollars 

Number of Form 1098 filings 5th 10th 25th 50th 75th

0 $75 $83 $437 $399 $517

1 80 84 89 88 145

2 153 108 122 150 222

3 325 278 228 329 619

4 or more 501 433 331 683 959

2005

Schedule A, line 10 deduction distribution by certain percentiles in dollars 

Number of Form 1098 filings 5th 10th 25th 50th 75th

0 $56 $59 $313 $242 $400

1 64 67 57 66 93

2 107 97 102 115 164

3 178 174 172 217 352

4 or more 260 297 321 511 629

2006 

Schedule A, line 10 deduction distribution by certain percentiles in dollars 

Number of Form 1098 filings 5th 10th 25th 50th 75th

0 $72 $87 $280 $355 $645

1 74 65 62 82 123

2 115 87 100 102 173

3 223 226 274 299 490

4 or more 365 264 328 519 685

Source: GAO analysis of IRS data. 

Page 46 GAO-09-769 Mortgage Interest Deduction 
Appendix VI: Margins of Error Tables for 

Estimates in Appendix V 

Table 16: Margins of Error for Results of Comparing Total Schedule A, Line 10 Deduction Amounts to Amounts Reported on 

Form 1098, 2004 through 2006 

2004 

Result of comparison 

Total number of tax 

returns (millions) Percentage

Schedule A, line 10 

amount (billions of 

dollars) 

Difference between Form 

1098 and line 10 amounts 

(millions of dollars)

Match a0.58 $2.49 -

Deduction exceeds Form 1098 

amount 

a 0.40 1.95 $1,034.82

Deduction less than Form 1098 

amount 

a 0.45 1.53 759.44

No Form 1098 a 0.85 0.78 778.34

Total a a$2.66 -

2005 

Result of comparison 

Total number of tax 

returns (millions) Percentage

Schedule A, line 10 

amount (billions of 

dollars) 

Difference between Form 

1098 and line 10 amounts 

(millions of dollars)

Match a 0.42 $2.09 -

Deduction exceeds Form 1098 

amount 

a 0.27 1.74 $1,213.18

Deduction less than Form 1098 

amount 

a 0.34 1.43 833.85

No Form 1098 a 0.68 0.61 614.00

Total a a $2.47 -

2006 

Result of comparison 

Total number of tax 

returns (millions) Percentage

Schedule A, line 10 

amount (billions of 

dollars) 

Difference between Form 

1098 and line 10 amounts 

(millions of dollars)

Match a 0.41 $2.46 -

Deduction exceeds Form 1098 

amount 

a 0.25 1.45 $394.38

Deduction less than Form 1098 

amount 

a 0.33 1.64 1,026.84

No Form 1098 a 0.63 0.72 717.90

Total a a $2.60 -

Source: GAO analysis of IRS data. 

a

The values of these margins are less than 0.01. 

Page 47 GAO-09-769 Mortgage Interest Deduction 
Appendix VI: Margins of Error Tables for 

Estimates in Appendix V 

Table 17: Margins of Error for Percentile Distributions for Schedule A, Line 10 Amounts Compared with Form 1098 Amounts 

and the Difference between Schedule A, Line 10 Amounts and Form 1098 Amounts, 2004 through 2006 

2004 

Percentiles in dollars 

Output of comparison 5th 10th 25th 50th 75th

Match . . . . .

Deduction exceeds Form 1098 amount $290 $227 $192 $281 $613

Deduction less than Form 1098 amount 228 208 200 239 400

Schedule A, line 10 amount 

No Form 1098 75 83 437 399 517

Match . . . . .

Deduction exceeds Form 1098 amount 10 17 24 94 301

Deduction less than Form 1098 amount 15 32 57 83 233

Difference between line 10 

and Form 1098 amounts 

No Form 1098 75 83 437 399 517

2005 

Percentiles in dollars

Output of comparison 5th 10th 25th 50th 75th

Match . . . . .

Deduction exceeds Form 1098 amount $228 $253 $184 $232 $442

Deduction less than Form 1098 amount 195 142 160 213 339

Schedule A, line 10 amount 

No Form 1098 56 59 313 242 400

Match . . . . .

Deduction exceeds Form 1098 amount 5 13 18 33 187

Deduction less than Form 1098 amount 19 26 32 81 192

Difference between line 10 

and Form 1098 amounts 

No Form 1098 56 59 313 242 400

2006 

Percentiles in dollars 

Output of comparison 5th 10th 25th 50th 75th

Match . . . . .

Deduction exceeds Form 1098 amount $217 $203 $199 $264 $583

Deduction less than Form 1098 amount 167 164 164 213 390

Schedule A, line 10 amount 

No Form 1098 72 87 280 355 645

Match . . . . .

Deduction exceeds Form 1098 amount 6 14 19 83 232

Deduction less than Form 1098 amount 20 31 39 89 220

Difference between line 10 

and Form 1098 amounts 

No Form 1098 72 87 280 355 645

Source: GAO analysis of IRS data. 

Page 48 GAO-09-769 Mortgage Interest Deduction 
Appendix VI: Margins of Error Tables for 

Estimates in Appendix V 

Table 18: Margins of Error for Year-to-Year Changes in Amount Deducted on Schedule A, Line 10, 2004 through 2006 

Percentile of change of line 10 deduction 

amounts in dollars 

Years Number of sample tax returns 5th 10th 25th 50th 75th

Increase all years 2004-2005 1,232.72 $16 $20 $30 $64 $195

2005-2006 1,232.72 18 24 41 75 200

Increase, then lower 2004-2005 1,170.13 17 18 34 102 224

2005-2006 1,170.13 7 10 20 58 176

Lower, then increase 2004-2005 1,215.27 7 8 25 48 101

2005-2006 1,215.27 18 18 36 101 235

Lower, all years 2004-2005 1,219.63 4 3 7 14 42

2005-2006 1,219.63 4 4 6 14 27

Source: GAO analysis of IRS data. 

Table 19: Margins of Error for Year-to-Year Changes in the Number of Form 1098 Filings, with Distribution of Change Amounts 

on Schedule A, Line 10, 2004 through 2006 

Percentile distribution of change in dollar 

amounts 

Years Number of tax returns 5th 10th 25th 50th 75th

Down all years 2004-2005 629 $69 $119 $179 $424 $1,039

2005-2006 629 48 81 159 532 892

Down, then up 2004-2005 996 56 44 99 164 387

2005-2006 996 51 63 141 179 597

Down, then the same 2004-2005 1,027 17 31 54 94 306

2005-2006 1,027 10 10 21 58 164

More, then fewer 2004-2005 1,196 28 39 61 132 337

2005-2006 1,196 24 47 65 152 298

Up all years 2004-2005 930 60 72 178 257 752

2005-2006 930 140 113 292 662 906

Up, then the same 2004-2005 1,186 23 31 77 143 380

2005-2006 1,186 32 33 59 206 528

Same, then fewer 2004-2005 958 23 41 58 168 564

2005-2006 958 27 47 79 169 379

Same, then up 2004-2005 1,370 9 11 21 68 172

2005-2006 1,370 15 31 62 129 331

Same all years 2004-2005 1,361 4 5 8 18 52

2005-2006 1,361 4 4 7 19 54

Source: GAO analysis of IRS data. 

Page 49 GAO-09-769 Mortgage Interest Deduction 
Appendix VI: Margins of Error Tables for 

Estimates in Appendix V 

Table 20: Margins of Error for Number of Matching Loan Account Numbers on Forms 

1098, 2004 through 2006 

Account number matches, 2004 to 2005 Number of tax returns Percentage

0 1,677.24 0.51

1 1,624.59 0.56

2 1,124.92 0.39

3 490.38 0.40

4 or more 225.27 0.28

Total 1,387.08 a 

Account number matches, 2005 to 2006 Number of tax returns Percentage

0 1,506.23 0.48

1 1,664.22 0.56

2 1,278.87 0.43

3 562.73 0.42

4 or more 283.62 0.31

Total 1,387.08 a

Number of matching account numbers in 

all years Number of tax returns Percentage

0 1,633.34 0.56

1 1,474.68 0.56

2 964.55 0.31

3 463.57 0.41

4 or more 197.94 0.30

Total 1,387.08 a

Source: GAO analysis of IRS data. 

a

The values of these margins are less than 0.01. 

Page 50 GAO-09-769 Mortgage Interest Deduction 
Appendix VI: Margins of Error Tables for 

Estimates in Appendix V 

Table 21: Margins of Error for Numbers of Individual Income Tax Returns with Schedule A Mortgage Interest Deductions and 

Non-Schedule A Mortgage Interest Deductions, 2004 through 2006 

2004 2005 2006 

Number of 

tax returns Percentage

Number of 

tax returns Percentage 

Number of 

tax returns Percentage

Only Schedule A 1,439.72 0.26% 1,053.89 0.19 989.20 0.18

Only non-Schedule A 663.07 0.27 548.72 0.25 494.11 0.23

Schedule A and nonSchedule A 572.83 0.25 459.87 0.22 441.82 0.21

No mortgage interest 2,797.03 0.26 1,806.69 0.19 1,712.74 0.18

Total 1,988.22 a 1,382.43 a 1,306.17 a 

Source: GAO analysis of IRS data. 

a

The values of these margins are less than 0.01

Page 51 GAO-09-769 Mortgage Interest Deduction 
Appendix VII: SMR Research’s Data on Home 

Equity Debt and How IRS Might Use Similar Appendix VII: SMR Research’s Data on Home Data for Enforcement 

Equity Debt and How IRS Might Use Similar 

Data for Enforcement 

Table 22 describes the three types of home equity loans—lump sum home 

equity loans, home equity lines of credit, and refinancings—that SMR 

Research included in its calculations of home equity loan debt that 

exceeded $100,000, the home equity debt limitation.1

Table 22: Types of Transactions Included in SMR Research’s Home Equity Debt 

Calculations 

Type of transaction Comment about the type of transaction 

Lump sum home equity loans 

of greater than $100,000 

These loans exclude second mortgages taken out at the 

time of purchasing a house. 

Home equity lines of credit 

greater than the amount on 

which the average amount 

borrowed would yield 

$100,000 

These lines of credit exclude second mortgages taken 

out at the time of purchasing a house. According to SMR 

Research, the average draw-down rate for home equity 

lines of credit was 50.16 percent at June 30, 2008. 

Based on that rate, the line of credit that would result in a 

draw-down amount more than the $100,000 limit for 

deductible interest would be $199,362. 

Refinancings in which cash of 

more than $100,000 was 

taken out beyond the 

homeowner’s original loan 

amount 

Because the $100,000 limitation for deducting interest on 

home equity debt refers in a refinancing to $100,000 

more than the outstanding mortgage principal balance 

and because the original loan amount often exceeds the 

outstanding balance, SMR Research captured only some 

of the cash amounts taken out at refinancing that 

exceeded the limitation. SMR considered all of a 

homeowner’s outstanding refinancings and compared 

the sum of them to the loan amount that the homeowner 

originally borrowed. 

Source: GAO analysis of SMR Research information. 

Although SMR Research data do not include Social Security numbers 

useful in data matching, its data include (1) homeowner names and 

addresses; (2) loan dollar amounts useful for determining if loan 

limitations for deductible interest were exceeded; and (3) other 

information useful in audit selection or other compliance activities. An 

 

1

Another source of information showing there are potentially large numbers of home equity 

loans above the $100,000 limit for deducting interest is the American Housing Survey for 

the United States: 2007, prepared by the U.S. Department of Housing and Urban 

Development and the U.S. Census Bureau. The Survey shows 197,000 owner-occupied 

housing units were refinanced in which owners received cash of $100,000 or more at 

settlement. These homeowners had situations similar to the third type of transactions in 

table 14—refinancings with more than $100,000 taken out. The Survey data compared the 

most recent loan refinancing to the previous loan amount, not to the original loan amount, 

if other refinancings had occurred. SMR Research’s data account for the possibility that 

homeowners refinanced more than once, each time taking cash out and adding to their 

total home equity debt. 

Page 52 GAO-09-769 Mortgage Interest Deduction 
Appendix VII: SMR Research’s Data on Home 

Equity Debt and How IRS Might Use Similar 

Data for Enforcement 

example of this other SMR Research information that might be useful for 

compliance purposes is information showing that more than a third of the 

cash-out refinancing dollar amounts and the home equity loan dollar 

amounts not known to be associated with lines of credit were in just 14 

counties. Pinpointing homeowners with the largest home equity loans or 

who live in one of a few counties with taxpayers having large proportions 

of the nation’s home equity loan dollar value might ease IRS’s burden in 

matching large amounts of information to its own databases. However, we 

recognize that matching databases using names and addresses is much 

more difficult than using Social Security numbers and that its viability 

would have to be tested. For instance, IRS could run a name and address 

match for a particular geographic location and follow up with only those 

taxpayers whose information matched without extensive effort. If the test 

were to show a low return on investment or did not deserve a higher 

priority than competing efforts, it could be abandoned. 

IRS follow-up could be examinations, possibly targeted at geographic 

areas or taxpayers with the largest potential overdeductions; 

correspondence to taxpayers as described in an earlier section; or 

outreach to the tax return preparation community. Outreach to preparers 

could inform them that the home equity area is being scrutinized by IRS 

and, if taxpayers’ returns had not properly considered the $100,000 or fair 

market value limitations, amended returns might be warranted. Nonexamination efforts might be preferable to resource-intensive 

examinations because the amounts of possible extra tax per noncompliant 

taxpayer might be relatively small. For example, if a taxpayer with an 8-

percent interest rate on a $200,000 home equity loan deducted interest on 

the entire loan, the overdeduction would be about $8,000, or about $2,000 

in taxes for a taxpayer in the 25-percent bracket. 

Page 53 GAO-09-769 Mortgage Interest Deduction 
Appendix VIII: Comments from the Internal Appendix VIII: Comments from the Internal Revenue Service 

Revenue Service 

Page 54 GAO-09-769 Mortgage Interest Deduction 
Appendix VIII: Comments from the Internal 

Revenue Service 

Page 55 GAO-09-769 Mortgage Interest Deduction 
Appendix VIII: Comments from the Internal 

Revenue Service 

Page 56 GAO-09-769 Mortgage Interest Deduction 
Appendix VIII: Comments from the Internal 

Revenue Service 

Page 57 GAO-09-769 Mortgage Interest Deduction 
Appendix IX: 

A

GAO Contact and Staff 

cknowledgments 

Page 58 GAO-09-769 Mortgage Interest Deduction 

Appendix IX: GAO Contact and Staff 

Acknowledgments 

James R. White, (202) 512-9110, whitej@gao.gov

In addition to the contact named above, Charlie Daniel, Assistant Director; 

Amy Bowser; Sara Daleski; Eric Gorman; Lawrence Korb; Karen O’Conor; 

Anne Stevens; and John Zombro made key contributions to this report. 

GAO Contact 

Acknowledgments 

(450675) 
GAO’s Mission The Government Accountability Office, the audit, evaluation, and 

investigative arm of Congress, exists to support Congress in meeting its 

constitutional responsibilities and to help improve the performance and 

accountability of the federal government for the American people. GAO 

examines the use of public funds; evaluates federal programs and policies; 

and provides analyses, recommendations, and other assistance to help 

Congress make informed oversight, policy, and funding decisions. GAO’s 

commitment to good government is reflected in its core values of 

accountability, integrity, and reliability. 

The fastest and easiest way to obtain copies of GAO documents at no cost 

is through GAO’s Web site (www.gao.gov). Each weekday afternoon, GAO 

posts on its Web site newly released reports, testimony, and 

correspondence. To have GAO e-mail you a list of newly posted products, 

go to www.gao.gov and select “E-mail Updates.” 

Obtaining Copies of 

GAO Reports and 

Testimony 

Order by Phone The price of each GAO publication reflects GAO’s actual cost of 

production and distribution and depends on the number of pages in the 

publication and whether the publication is printed in color or black and 

white. Pricing and ordering information is posted on GAO’s Web site, 

http://www.gao.gov/ordering.htm. 

Place orders by calling (202) 512-6000, toll free (866) 801-7077, or 

TDD (202) 512-2537. 

Orders may be paid for using American Express, Discover Card, 

MasterCard, Visa, check, or money order. Call for additional information. 

Contact: 

Web site: www.gao.gov/fraudnet/fraudnet.htm

E-mail: fraudnet@gao.gov

Automated answering system: (800) 424-5454 or (202) 512-7470 

Ralph Dawn, Managing Director, dawnr@gao.gov, (202) 512-4400 

U.S. Government Accountability Office, 441 G Street NW, Room 7125 

Washington, DC 20548 

To Report Fraud, 

Waste, and Abuse in 

Federal Programs 

Congressional 

Relations 

Chuck Young, Managing Director, youngc1@gao.gov, (202) 512-4800 

U.S. Government Accountability Office, 441 G Street NW, Room 7149 

Washington, DC 20548 

Public Affairs 

Please Print on Recycled Paper