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A quick double question for you. Is an individual allowed to use accrual accounting for tax purposes in filing their individual income tax return, Form 1040? If so, if they did not pay mortgage interest in 2008 because they are delinquent on their mortgage payments (but not in foreclosure and have all intentions of restructuring their loan or catching up with payments when they get a new job) can they deduct the accrued but unpaid mortgage interest on their 2008 tax return since they are liable for it?

Submitted: 123 days and 9 hours ago.

Category: Tax

Value: $15

Status: CLOSED

Posted by Merlo 123 days and 9 hours ago.

Answer

Hello XXXXXXX,

Any taxpayer (individual or business) may choose to file his taxes using either the cash method or the accrual method. You establish the method that you wish to use when you file your very first tax return. No special approval is required to use either method when you file your very first return. After your initial return has been filed, if you wish to change your accounting method from cash to accrual or vice versa, you must first file Form 3115 with the IRS to request the change.

Under the cash method, you generally report income in the tax year you receive it and deduct expenses in the tax year you pay them. Under an accrual method, you generally report income in the tax year you earn it, regardless of when payment is received, and deduct expenses in the tax year you incur them, regardless of when payment is made.

Here is a link to publication 538 which discusses the accounting methods which must be used and the rules to follow when changing your accounting method.

http://www.irs.gov/pub/irs-pdf/p538.pdf

If this was helpful please press the Accept button. Positive feedback is also appreciated.

Thank you XXXXXXX.

123 days and 9 hours ago.

Reply

Can I deduct my mortgage interest in 2008 that accrued but is unpaid is the crust of my question. What you explained, I already know, I want a definitive answer. Given my circumstances, can I deduct my mortgage interest in 2008?

Posted by Merlo 123 days and 9 hours ago.

Answer

Hello again XXXXXXX,

Yes, you may deduct any mortgage interest which was accrued in 2008, even if the payments were not actually made until 2009 or a later year, using the accrual method.

The same would apply to your real estate taxes on the home. If your did not pay your 2008 real estate tax until sometime in a later year, you would still be able to deduct those taxes in the 2008 tax year using the accrual method.

Thank you again XXXXXXX, and let me know if you have more questions. I am happy to help you with whatever I can.

123 days and 9 hours ago.

Reply

Merlo, remember what my situation is, it is not just that I have not paid the mortgage interest but it is delinquent due to the loss of my job. Because I did not pay any mortgage at all in 2008 (due to hardship), the part of the mortgage payment that would ahve been interest obviously was not paid also. Becasue there was no payment, I did not receive a Form 1098 from the mortgage holder. How would the IRS know that this was accrued? What document do I send with my return?

Posted by Merlo 123 days and 9 hours ago.

Answer

Hello again XXXXXXX,

You are correct that you would not have a 1098 form. The 1098 forms are only issued to show the amount of interest actually paid in a given year.

However, even using the cash method of accounting, you would never need to submit the 1098 form with your tax return. So it is the same case when you file on the accrual method. You are not required to actually submit any documentation with your return.

There are many cases even with taxpayers using the cash method who have no 1098 form because they have owner financing on their home, and in these cases a 1098 form is never issued, but the taxpayer is still allowed to deduct the interest paid.

The only thing that you should do is keep the proper documentation to show the interest that was due for the year. This might include payment statements you received from the bank or a copy of your amoritization schedule that shows each payment that was due for the 2008 tax year. This would only ever be needed if you ever happened to be selected for an audit. But you do not actually need a 1098 form to deduct this interest expense.

Thank you again XXXXXXX, and let me know if you have more questions.

123 days and 8 hours ago.

Reply

since my initial return was filed on a cash basis, would you recommend that I file form 3115 and get approval for the change in acct method to the accrual method first before taking the deduction for accrued taxes on my 2008 or do you recommend I file the return and the form 3115 simutaneously.

If your recommendation is that I file and get approval before filing my 2008 return,(1) how long does it take to get a 3115 response from the IRS?
(2 Have you any experience with them denying the change for any taxpayer

(3) What are some of the basis for denial that you know of

(4) what if i file both simutaneously and they deny my 3115 will i have to file an ammended return?

(5) What will happen in the futrue years, if I am not able to arrange with my bank a restructuring of my loan and, accordingly, they foreclose (which of course means I will never have to pay the accrued 2008 interest) how will that affect my tax return in the future year if this event takes place?

Posted by Merlo 123 days and 8 hours ago.

Answer

Hello again XXXXXXX,

The type of change that you are requesting does not require advance filing or approval. You would file the Form 3115 along with your tax return for the year you are requesting the change.

The only reason that you might be ineligible to automatically make this change would be if you were currently under examination by the IRS for a prior tax year. As long as that is not the case, your application will qualify to be automatically approved. If you are currently under examination, then you would have to file for advance approval to make this change.

If in some future year you end up not actually paying this interest due to a foreclosure or any other reason, then in the year that occurs you would need to reclaim the amount that was deducted, and it becomes taxable income to you in that year. Remember, you would now be on the accrual method. So by virtue of that fact, if you go through a foreclosure, then in the year that occurs your accrued expense is now reversed.

If this was helpful please press the Accept button. Positive feedback is also appreciated.

Thank you XXXXXXX.

123 days and 8 hours ago.

Reply

Thank you Merlo, you were very helpful. I had offered $15 for this answer but will double it to $30 since you were so helpful. Frankly, if I could afford more at present I would actually offer you $150 but money is tight right now but, in addition to doubling my original offer to $30, I give you what I have in abundance, and that is the Love of God. May His peace that passeth all understanding guide your heart and mind and cause you to prosper in all that you put your hand to.

God bless you.

Posted by Merlo 123 days and 8 hours ago.

Answer

Hello XXXXXXX,

Thank you so very much for your thoughtfulness and your kind words. You helped brighten my day.

123 days and 8 hours ago.

Reply

God bless you, I would like to keep in touch with you since I know I will have many more questions later. My e-mail address is XXXXX@XXXXXX.XXX. Do you have an e-mail address?

Accepted Answer

Hello again sirach,

Unfortunately, under the terms of this website, we are not allowed to exchange email addresses or any other personal information with the customers. I believe it is all part of their intent to keep the customers coming through this website for help, rather than diverting the business directly to the experts, which is understandable.

Even when you try to give me your email address, it will not show up. It comes through as XXXXX@XXXXX.XXX

All I can suggest is that if you have additional tax related questions in the future, you can still come through this forum and request any one particular expert that you wish to work with. As long as I am in the forum at the time, I will be happy to try and help you.

If this was helpful please press the Accept button so I receive credit for helping with your questions. Positive feedback is also appreciated.

Thank you again XXXXXXX.

Accepts:
Expert:	Merlo
Pos. Feedback:	99.8 %
Answered:	7/22/2009

Accountant

25+ years tax consulting. Specializing in returns for US citizens living abroad

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Can I deduct my mortgage interest in 2008 that accrued but is unpaid is the crust of my question. What you explained, I already know, I want a definitive answer. Given my circumstances, can I deduct my mortgage interest in 2008?

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Hello XXXXXXX, Thank you so very much for your thoughtfulness and your kind words. You helped brighten my day.

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God bless you, I would like to keep in touch with you since I know I will have many more questions later. My e-mail address is XXXXX@XXXXXX.XXX. Do you have an e-mail address?

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Hello XXXXXXX,

Thank you so very much for your thoughtfulness and your kind words. You helped brighten my day.