Dealing With IRS Tax Credit Rejections

The IRS has been rejecting first-time home buyer claims from anyone who shows a Form 1098 Mortgage Interest Expense in their prior year files.

In many cases, the applicants are entitled to the credit because their previous mortgage interest deduction is for a timeshare, mobile home, boat, or other recreational property.

If you have a client who is in this unfortunate position, here is some advice from Enrolled Agent Eva Rosenberg, who authors the Web site TaxMama.com.

• Respond to the IRS immediately and tell them why their rejection is wrong. Be prepared to prove that the mortgage the IRS is seeing isn’t on a personal residence. First-time home buyers are entitled to own other types of real estate and still get the home buyers credit, so provide proof that the previous mortgage was on something else.

• Send a letter explaining the situation and providing proof of a previous rental or other non-ownership living situation, including copies of rental contracts for the last three years, an old driver's license showing that address, utility bills, etc.

• Home buyers who believe the IRS may view their situation in this way should be proactive, providing proof that they are a first-time buyer when they initially file for the credit.

• Anyone who is rejected after two attempts to explain the problem to the IRS should call the Taxpayers Advocate Service toll-free, (877) 777-4778, their Congressman, and their Senator, Rosenberg advises.

Source: TaxMama.com, Eva Rosenberg, EA (06/16/2010)