- The Washington Times - Monday, July 20, 2009

What are the chances that your 1040 form will be bounced by IRS computers for an audit? Here are some of the items that increase the likelihood of your return drawing the agency’s attention.

SOME POINTERS ON POINTS: Allowable deductions for interest on home mortgages include mortgage points, those additional, upfront fees, also known as “loan origination fees” that lenders charge. But the Internal Revenue Service is on the lookout for borrowers taking impermissible deductions for points.

They are 100 percent deductible in the year of payment, provided you pay them to obtain a loan to buy, build or improve (as when you add or remodel a room) your “principal residence,” IRS lingo for a year-round dwelling, as opposed to a vacation retreat or property for which you charge rent.

But in most cases, forget about any immediate deduction for points paid to refinance (with none of the proceeds used to pay for improvements) a mortgage on your principal residence. You must spread the points deduction over the life of the loan.

The IRS knows that ever more refinancers have been succumbing to temptation and claiming their points as if they were fully deductible in a single swipe. The difference is not chopped liver: a year-of-payment deduction of $9,000, as opposed to an annual deduction of just $600 in the case of a 15-year loan for $300,000 and $9,000 in points.

RENTAL LOSSES: A complex set of rules drastically restricts these losses. That is why the IRS might demand proof that, among other things, you correctly computed the deduction and satisfied the key requirement of active participation in the rental activity - selecting tenants and supervising property managers, for example. Satisfy those stipulations and you are able to offset as much as $25,000 of losses against non-passive income, such as salary or investment income.

The IRS suspects many landlords make math mistakes. Its apprehension is understandable, as the full deduction of $25,000 is available only for someone whose AGI, adjusted gross income, the amount on the last line of page one of Form 1040, is below $100,000. That threshold is significant because the allowable deduction diminishes by one dollar for each two dollars of AGI beyond $100,000 and disappears completely when AGI tops $150,000.

What if you flunk the AGI test or your participation is passive, as opposed to active? Then the IRS lets you offset the loss only against passive income from, say, a limited partnership or some other kind of tax shelter.

CASUALTY AND THEFT LOSSES: They are another area that has traditionally been minutely scrutinized because many taxpayers misunderstand the convoluted rules. The big hurdle: These kinds of losses usually are deductible only to the extent that the total amount in any one year, reduced by $100 ($500 for 2009) for each casualty or theft, exceeds 10 percent of your AGI.

The IRS is aware of the tendency of some taxpayers to overlook the 10-percent-of-AGI rule. Moreover, the measure of the loss is the lesser of (1) the difference in value of the property just before and after the event (for a theft, the value afterward is zero, as you cease to possess any property) or (2) the property’s “adjusted basis,” which often is what you originally paid, when you use it only for personal reasons - family furniture, for instance.

You might reduce the risk of an audit when you claim “red flag” deductions by including a brief written explanation with your return. If you submit documents that help support your statement, attach copies and not originals, because the documents might become separated from your return. Don’t submit originals until the IRS actually asks for proof of your deductions.

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