Summary: The Internal Revenue Service (IRS) needs to reduce overstated real estate tax deductions that lead to millions of dollars in tax losses for federal, state, and local governments. From 1982 to 1990, individuals' federal deductions of real estate taxes increased 81 percent--from $27 billion to $49 billion. IRS audits show that individuals in 1988 overstated their real estate tax deductions by an estimated $1.5 billion nationwide. GAO believes that this level of noncompliance has resulted in nearly $300 million in federal income tax loss for 1988 and has increased to about $400 million for 1992. However, GAO's review of IRS audits of taxpayers who claimed the deduction for 1988 in three locations--Montgomery County, Maryland; New Jersey; and Minnesota--uncovered a much higher level of noncompliance. IRS detected only about $37 million (29 percent) of $127 million in overstated deductions that arose from user fee and rebate errors. Examiners would have caught more noncompliance had they followed IRS audit guidelines on checking source documents to verify taxpayers' support for deductions.
