Prepaying property taxes? Your financial institution might make you an audit danger

Pat Greenhouse | The Boston Globe | Getty Photographs

The house at 5 Baker Court docket, September 1, 2016. On Baker Court docket and Fields Court docket, close to the South Bay Procuring Middle, two slim paved paths so tiny they may hardly be known as streets, some longtime property house owners imagine they’re sitting on an actual property goldmine.

In my colleague Ben Casselman’s article this week on the Inner Income Service’s side-eyed guidance for the entire individuals dashing to prepay property taxes, he quoted some phrases of warning from Andy Grewal, a professor of tax regulation on the College of Iowa.

Mr. Grewal stated owners who often paid their property taxes by means of an escrow account through their mortgage servicer might find yourself dealing with an audit in the event that they pay as you go at their native assessor’s workplace this time. That is as a result of the tax funds the people report back to the I.R.S. on their tax varieties might differ from what the banks would report on the separate varieties they use when reporting mortgage exercise to the federal government. Differing figures elevate questions on the I.R.S.

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That received me questioning: Could not you simply name your financial institution and ask it to replace the determine it places by itself varieties? It seems the reply could also be no, however this challenge shouldn’t be easy or constant amongst banks, both.

Mr. Grewal was proper to fret about this challenge, given the variety of individuals with escrow accounts. In accordance with the Mortgage Bankers Affiliation, 79 % of debtors had escrow accounts in 2016 from which they paid property taxes on their main mortgage.

However not all banks report property tax funds on the shape they generate, Form 1098. Wells Fargo says it does report property tax funds on Line 10 of the shape, which is just labeled “Different.” And no, alas, you can not name the financial institution up and ask it so as to add no matter you’re paying by yourself to what was already despatched from the escrow account this yr. It is not going to alter the determine.

Apparently, although, there isn’t a authorized requirement for a financial institution to report property taxes paid from an escrow account in any respect. Financial institution of America, Chase and Quicken Loans don’t report it. Financial institution of America was fulfilling requests for added property tax funds from individuals who already had property tax payments in hand, nevertheless it stopped doing so on Tuesday.

Additionally, this is an alert for a potential future headache: When you do prepay and have a mortgage and an escrow account, it could be a problem (or inconceivable) to get the financial institution to regulate the unique 2018 property tax fee schedule that it set in your behalf. It would be best to let the financial institution know what you probably did and ask it to make no matter changes it could actually.

So individuals who wish to prepay earlier than Sunday however keep away from bother with the I.R.S. are confronted with an fascinating set of questions. When you’re certain that your jurisdiction has formally assessed taxes which you could prepay and deduct this yr however you’ve got a mortgage with Wells Fargo, you’ll in all probability don’t have any drawback if the I.R.S. hassles you about differing quantities on totally different varieties. However would the company additionally then assist itself to a take a look at different components of your tax return? And have you ever toed the road on a few of these different components, or stepped over it?

Individuals who have mortgages with Financial institution of America, Chase and Quicken Loans might really feel they’re within the clear due to a scarcity of conflicting tax varieties, even when their native taxing authority has not been exact on whether or not prepayments fall consistent with the steering that the I.R.S. issued this week. However beware: In case your property tax deduction is way larger in 2017 than it was in 2016 with out your having modified residences, that might be its personal flag for some line of audit-sniffing code that the I.R.S. has written or will write within the subsequent few weeks.

As at all times in issues like these, it is best to seek the advice of tax professionals, even when they, too, lack a crystal ball or the abilities essential to learn between the strains on I.R.S. steering.

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