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NEW YORK (MainStreet<\/a>) \u2014 With the Internal Revenue Service digging behind seat cushions looking for extra cash, it\u2019s no surprise it\u2019s getting more aggressive about taxpayers who pay a lot of mortgage interest<\/a> but don\u2019t declare a lot of income.<\/p>\n Goodness knows, the federal government needs the money. At a time when the federal deficit stood at $1.4 trillion, federal tax revenues <\/a> fell off a cliff not too long ago. According to a study by the American Institute for Economic Research, federal tax monies declined by $138 billion from April 2008 through April 2009. That\u2019s a 34 percent drop in tax revenues, the AIER reports.<\/p>\n That\u2019s the biggest reason why the IRS is taking a keener interest in your mortgage<\/a> interest \u2014<\/i> it might lead them to a nice tax payday unless you\u2019re careful.<\/p>\n Here\u2019s what the IRS is looking for, and what you can do about it:<\/p>\n READ:\u00a0Tax deductions for mortgage points<\/a><\/p>\n If you\u2019re a homeowner, every tax season the IRS gets a copy of your mortgage interest statement, also known as IRS form 1098 (your lender sends a copy to you and to the IRS). Form 1098 shows the exact amount of interest you paid on your monthly mortgage for the previous tax year.<\/p>\n The number on that tax form is a significant clue to the IRS. Agency computers can \u201cmatch\u201d the interest<\/a> deduction that your lender provides with the number on your tax form, using your Social Security number.<\/p>\n By comparing your tax returns with the data your mortgage lender provides, the IRS has had some good luck digging up some loose cash \u2014<\/i> all at taxpayer expense. According to the U.S. Treasury Inspector General for Taxpayer Administration, the IRS tracked down 227,000 tax returns looking for answers on mortgage deduction discrepancies in 2004 and 2005.<\/p>\n That led to 70,000 refiled tax returns, and $276 million in back taxes<\/a> on newly calculated mortgage interest deductions. How did TIGTA do the math? According to its Web site, TIGTA sampled 1098 tax forms from 2005 that showed mortgage interest of more than $20,000 and attempted to match it to corresponding tax returns. The research found that the unpaid tax amount based on misreported mortgage deductions ranged between $352 million and $900 million \u2013 not exactly chump change to Uncle Sam, who obviously needs the money these days.<\/p>\n Plus, it\u2019s not just the federal government. Some states, such as California, have created campaigns targeting taxpayers who might be abusing the mortgage interest deduction rules.<\/p>\n According to the California Franchise Tax Board, the state collected $40 million in a pilot program in 2007. (Read the full TIGTA report<\/a>.)<\/p>\n What can you do if you\u2019re targeted?<\/b><\/p>\n If you do get an IRS notice asking you to clear up a mortgage interest deduction issue, make sure you respond right away. Include any appropriate mortgage statements, canceled checks or copies of correspondence from any family members, businesses or friends who either gave you or loaned you money to pay your mortgage. You\u2019ll need to include copies of your tax returns for the year in question.<\/p>\n