VA Funding Fee (IRS bill for back taxes from 2009)

I deducted my VA funding fee of $8,085.00 back when I completed my 2009 tax return based on Q&A on turbotax that it was tax deductible since it was essentially prepaid mortgage insurance.  The IRS bill I got today indicates my mortgage insurance deduction on my 2009 return was $8,085.00, but the IRS corrected it to $0.00. Now I owe $4,221 in back taxes.   I checked with my mortgage company (chase), their policy is NOT to put VA funding fees on the 1098, just if you have regular mortgage insurance (that's probably the reason the IRS has no record of it).  Is/was the VA funding fee deductible?


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I finally 100% confirmed that the VA funding fee was deductible for 2009.  After going back & forth with the IRS thru letters/faxes quoting IRS publication 936 for 2009, the IRS now indicates the issue is settled and I owe $0.00 taxes for 2009.  I also sent them a copy of the HUD-1 showing the VA funding fee paid. It seems the confusion is attributed to a few things:  1)  The deductibility of the VA funding fee is relatively new (was not deductible until tax year 2007), 2)  No organization was specifically directed by the IRS to put it on a 1098 or any other tax document when it became deductible (the funding fee was not paid to my mortgage issuer (Chase Bank); since the fee was not paid to them they refused to include it on a corrected 1098.  It was paid to the VA, but the VA indicated thru an e-mail to me that they do not issue 1098's.  This complicated the issue because there was no actual "tax" document to show the fee paid.  I just had a non-tax document, the HUD-1 from my home loan closing).  The IRS finally accepted the deduction after the HUD-1 and 936 references were sent to them (along with copies of the replies from both Chase Bank & the VA).  Whew!
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