Mortgage loan originators, be warned – the taxman is on you like … well, like you on a prospect with a 20 percent down payment.
The Massachusetts Department of Revenue (DOR) is auditing the tax returns of loan originators, focusing specifically on un-reimbursed business expense deductions.
Those include vehicle expenses, parking fees, tolls and transportation expenses. They also include travel expenses during overnight trips away from home – airfare, hotels, car rentals, meals and entertainment.
The Massachusetts Mortgage Bankers Association (MMBA) is urging loan originators to “consult with your accountant or tax advisor” to “preserve the deductibility of appropriate business expenses” for outside salespeople.
And those salespeople would be well served to heed the MMBA’s advice, says Paul Gershkowitz, president of Needham-based Greenpark Mortgage.
‘Specific Criteria’
Gershkowitz told Banker & Tradesman “it’s pretty clear” that all loan originators should be “W2” employees of the companies for which they work.
That’s what Greenpark does, but it’s not the way all firms operate. And that could spell trouble for loan originators filing a Schedule C return intended for the self-employed.
“That’s a no-brainer” for auditors, Gershkowitz said. “[Certain originators] are going to say they’re self-employed when [technically] they’re not.”
“I’m sure the state and federal governments have rules for the ways you’re allowed to recover your expenses,” Gershkowitz said. “But they probably have [loan originators] deducting anything and everything they think is un-reimbursed business expense, and that’s probably the key to why the state is auditing LOs.”
“The Department of Revenue has very specific criteria for what constitutes an outside sales person” the MMBA said in its newsletter, “and therefore what expenses are allowed as deductions.”
Calls to the MMBA seeking further comment were not returned.
Still, some mortgage firms aren’t particularly worried about running afoul of the rules.
Rich Dinges, president of Northpoint Mortgage, told Banker & Tradesman he’d be surprised and concerned if the revenue department was singling loan originators out.
“I’ve never had an issue myself, and any salesperson would probably have similar non-reimbursed business expenses,” Dinges said. “I don’t know what sets us apart.”
Not Jibing
DOR representatives confirmed that they aren’t overtly singling out any one industry – but said mortgage originators’ returns, in particular, do tend to stand out from the crowd more often than others.
“We are not singling out loan originators,” said Bob Bliss, DOR spokesman. “We’re not targeting any group. It’s the numbers that pop out.”
In other words, loan originators need to be careful.
In the late 1980s, DOR began permitting certain outside salespeople to claim un-reimbursed business expenses. Since then, it has largely considered anyone who sells only outside an office to be an outside salesperson – and it does not consider loan originators to be outside salespeople.
“They’re entitled to travel and transportation expenses,” Bliss said of loan originators. “But if they’re taking a lot of other expenses, and it gets kicked out because it’s out of proportion,” an audit may be in their future.
DOR uses a program called Discover Tax to review tax returns. The system, regardless of the taxpayer’s industry, “kicks out” returns that “don’t seem to jibe,” Bliss explained.
Jon Skarin, senior vice president of the Massachusetts Bankers Association, said banks that once used outside salespeople on a commission basis have, in response to compensation guidelines for mortgage loan originators, brought them into the office as salaried employees.
“Some of the originators on the mortgage banking level are not salaried employees. This may be a little bit more of a focus on those folks,” Skarin said. “Banks that didn’t have salaried loan originators in the past have moved in that direction.”
