Andy Grewal, University of Iowa’s professor specializing in tax law, said that people should be wary when prepaying their property taxes. Homeowners who chose to pay their property taxes using an escrow account through their mortgage servicer might be susceptible to a tax audit. This is the case of their prepayment was done at the office of the local assessors. Before this happens, homeowners are urged to get audit shield in order to avoid unexpected cost from professional fees.
The reason for the tax audit can stem from the fact that the report of the individual for tax payments sent to the IRS may have be different from the one that the banks submit. This is because separate forms are used when they provide mortgage activity to the government. In cases where the figures are not the same, the IRS will be suspicious.
Some people might ask about the possibility of calling the bank to change the figure they are filling up on the form. There is a big chance that it is not possible.
Mr. Grewal is worried about this case happening because of the number of individuals that currently have escrow accounts. Data from Mortgage Bankers Association revealed that 79 per cent of borrowers in 2016 have their own escrow accounts. They used the same account to pay their property taxes for their primary mortgage.
There are banks that do not use the Form 1098 to report the payments for property tax. It is no possible for homeowners to call the bank and adjust the figures based on the amount they have paid on their own using their escrow account. The figure, in the end, will not be adjusted.
The fact is that the bank is not required by law to submit reports regarding payments made by clients using their escrow account. For the case of Chase and Bank of America, they are not reporting. To avoid confusions and unexpected costs, make sure to have audit shield in case there are discrepancies with bank report and the individual’s report.