The Treasury Inspector General for Tax Administration found about $976.8 million in questionable car loan interest deduction claims on 473,361 tax year 2025 returns, according to its Oct. 15 audit report. The IRS told the watchdog it will develop a post-processing compliance approach for those returns, with a target date of Dec. 21, 2026.
The deduction came from the 2025 tax law President Trump signed on July 4, 2025. It lets filers subtract up to $10,000 a year in interest on a loan for a new vehicle with final assembly in the United States, and it phases out above $100,000 of modified adjusted gross income ($200,000 for joint filers), the IRS says in a fact sheet. It applies from 2025 through 2028.
That leaves a plain question for anyone who took the deduction on a 2025 return: did the loan and the car meet every test? The loan has to have started after Dec. 31, 2024, be secured by a lien on the vehicle and finance a new vehicle for personal use, and the vehicle’s identification number has to appear on the return. Used cars and lease payments do not qualify. TIGTA says the 473,361 returns carried “potential eligibility concerns not currently addressed by IRS systemic checks.”
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Which cars and loans does the deduction cover?
The IRS fact sheet lists cars, minivans, vans, SUVs, pickup trucks and motorcycles under 14,000 pounds gross vehicle weight rating, as long as final assembly took place in the United States. Interest on a refinanced loan is generally eligible when the original loan qualified. The vehicle’s identification number is required on the return.
TIGTA says returns with potential eligibility concerns in these areas pass through IRS systemic checks without being flagged. Its second and third recommendations, covered below, would have the filing system verify required information or reject certain returns before accepting them.
What did the audit count, and where did the money sit?
TIGTA reviewed e-filed individual returns that the IRS accepted between Jan. 14 and April 15, 2026. It sorted the questionable car loan claims into three groups. The largest, 407,637 returns, accounted for about $851 million of the total. The other two, 45,589 returns and 20,135 returns, accounted for about $86.5 million and $39.4 million.
Added together, the claims come to $976,834,814 in deductions. The report was signed by Diana M. Tengesdal, TIGTA’s deputy inspector general for audit, and covers the IRS’s work to put several parts of the new law in place, not only the car loan deduction.
The audit also puts the deduction in context. The report cites a May 28, 2026 Joint Committee on Taxation publication that estimated lost revenue of $30.6 billion for the car loan interest deduction, compared with $31.7 billion for the tips deduction and $89.6 billion for the overtime deduction.
Is $976.8 million the money the IRS lost?
No. TIGTA describes the figure as potential tax revenue tied to questionable claims, “not a determination that all identified deductions were improper.” The estimated tax effect is about $122.4 million, which the auditors calculated by applying an effective tax rate of about 12.53 percent to the $976.8 million in deductions.
IRS management disagreed with that method. Its response says the estimate “assumes that all identified taxpayer deductions were erroneous” and does not account for compliance work the agency does after returns are processed. The gap between $976.8 million in claims and $122.4 million in tax is simply the difference between a deduction and the tax it saves.
What does the IRS owe on Dec. 21?
Only one of the report’s four recommendations carries a Dec. 21, 2026 date. Recommendation 4 asks the IRS’s Small Business/Self-Employed Division to develop a post-processing compliance approach for tax year 2025 and later returns that claim the new deductions. The IRS agreed and named the Director of Exam Case Selection in that division as the responsible official.
The date is for developing the approach, not for any letter, bill or audit result. What the IRS does with individual returns after that is a separate step, and the report’s recommendations do not set a date for it. Anyone who claimed the deduction correctly has nothing to fix, because the audit is about returns the system accepted without checking the loan and vehicle details.
Why did the IRS reject two of the fixes?
The disagreement is about timing. A check built into the filing system acts before the IRS accepts a return, while the compliance approach due Dec. 21 is a post-processing step that comes after the deduction has already been claimed.
Recommendations 2 and 3 were about the e-filing system. TIGTA wanted rules that check required information before the system accepts a return claiming the car loan deduction, and rules that reject returns when specified conditions are met. IRS management disagreed with both and pointed to a Feb. 22, 2026 correction and an Aug. 13, 2026 schema package.
TIGTA was not persuaded. It said the February correction does not fully address the problem and that the August package was partial progress that still needs more validation.
The first recommendation went to the IRS Office of Chief Counsel and concerned the overtime deduction, not car loans. TIGTA asked the office to consider adding examples of occupations exempt from the Fair Labor Standards Act, with references to Department of Labor guidance. The IRS said it had updated its FAQs in August 2026, and TIGTA said the new FAQs “meet the intent of our recommendation.”
Did your 2025 return include car loan interest?
A deduction taken without the lien, new-vehicle, final-assembly or vehicle number details in place is the kind TIGTA flagged, and the IRS has promised to build its approach to those returns by Dec. 21. A filer who is unsure what a return claimed can end up guessing at the next step.
The car loan deduction is only one line on a return, and the guide below does not cover it. Cut Your Retirement Tax Bill: 12 Moves is a 14-page guide to the other lines that set a retiree’s bill, including the new $6,000 senior deduction ($12,000 for a couple) for 2025 through 2028 and the 2026 numbers on one page.
See where the $6,000 senior deduction fits on a 2025 return, in a 14-page tax guide →
This article was produced with AI assistance and edited for accuracy against the sources linked above.
Warren Cohen is a finance writer based in Phoenix, Arizona, covering personal finance topics including credit, banking, and beginner investing. He earned his degree in business administration from Arizona State University and began his career working in consumer finance, where he gained direct experience with lending and credit systems. He now writes for personal finance websites and fintech platforms, focusing on clear, practical content that helps readers make informed financial decisions.
