Your car payment arrives every month like clockwork. You budget for it, you pay it on time, and you claim the interest as a tax deduction. But the grace period for car loan interest reporting ended in 2025 - and now lenders face full enforcement of Form 1098-VLI requirements.
I track IRS changes that affect auto loan interest because enforcement shifts create confusion at tax time. The transition relief that gave lenders breathing room during 2025 has expired. Starting with tax year 2026, full reporting requirements are in effect with standard penalties for non-compliance.
Here's what the end of transition relief means for your auto loan, how Form 1098-VLI reporting works now, and the three things you need to verify before this tax season. The grace period ended, but the steps stay simple when you know what to expect.
What Changed After the 2025 Transition Period
The One Big Beautiful Bill Act made auto loan interest deductible for qualifying vehicles starting in tax year 2025. This reversed decades of policy where only mortgage interest and student loan interest got special tax treatment. Car buyers can now deduct interest paid on vehicle loans when they file their taxes each April.
That change created a new requirement. Lenders who provide auto loans must report the interest you paid - similar to how mortgage companies send you Form 1098 each January. The IRS created Form 1098-VLI (Vehicle Loan Interest) to handle this reporting.
The transition relief period gave lenders extra time to set up their reporting systems during 2025. That grace period has ended. Full enforcement started January 1, 2026.
Here's what changed when transition relief expired:
- Standard penalties now apply for lenders who don't file Form 1098-VLI on time or who file with errors
- Simplified reporting options ended - lenders must use complete forms with all required data fields
- Flexible correction deadlines ended - standard IRS timelines now govern amended filings
- All information fields became mandatory - no reduced requirements like 2025 allowed
- Extended timeframes ended - borrowers should receive forms by January 31st without delays
The IRS expects mature reporting systems now. Lenders who struggled with the new requirements during 2025 had a full year to fix their processes. Starting with 2026 interest payments (reported in early 2027), the system runs at full capacity with no special accommodations.
Why does this matter if you're just a borrower paying your loan? Because your lender faces real penalties for reporting errors now. This creates stronger incentives for accurate reporting, but it also means lenders might be more cautious about corrections or adjustments. During the transition year, lenders could fix mistakes without penalty. Now corrections might require more formal processes.
Understanding Form 1098-VLI Under Full Enforcement
Form 1098-VLI works like Form 1098 for mortgages, but it tracks vehicle loan interest instead of home loan interest. Your auto lender fills it out and sends copies to you and the IRS. You use the information when you claim your interest deduction on Schedule A of your tax return.
The form shows how much interest you paid during the calendar year, which vehicle the loan covers, and identifying information for both you and the lender. What was simplified during 2025 is now required in complete detail.
Here's who must file Form 1098-VLI:
- Banks and credit unions that issue auto loans directly to consumers
- Auto finance companies that buy retail installment contracts from dealerships
- Dealer-arranged financing in cases where the dealer holds the loan directly
- Private lenders who make vehicle loans in the ordinary course of business
- Lease companies for qualifying lease arrangements that function as financing
The form must be filed if you paid $600 or more in interest during the year. Loans with interest payments below $600 don't require the lender to file, though some lenders file anyway to keep their systems consistent.
Information reported on Form 1098-VLI includes:
- Borrower name and taxpayer ID to match your tax return
- Lender name and ID so the IRS knows who filed the form
- Total interest paid during the calendar year
- Vehicle identification number linking the interest to the specific vehicle
- Loan origination date showing when financing started
- Outstanding balance at year-end for verification purposes
- Property address if applicable for business use verification
- Acquisition or refinance indicator showing loan purpose
All fields are now mandatory. The simplified versions some lenders used during 2025 no longer meet IRS requirements. This means more complete information on your form, but also more potential points where errors can occur.
The timeline works like this. Lenders must send your copy of Form 1098-VLI by January 31st of the following year. So for 2026 interest payments, you should receive the form by January 31, 2027. The IRS gives lenders until February 28 (or March 31 if filing electronically) to submit their copies. These deadlines are firm now - no extensions like the transition period allowed.
You don't file Form 1098-VLI with your return. You keep it with your tax records and use the interest amount when you itemize deductions. The form serves as proof if the IRS questions your deduction.
How Full Enforcement Affects Your Tax Deduction
The end of transition relief doesn't change whether you can deduct your auto loan interest. It changes how seriously the IRS treats mismatches between what you claim and what your lender reports.
Here's what matters now. You can deduct interest on loans used to buy, lease, or substantially improve a qualifying vehicle. The vehicle must weigh less than 6,000 pounds and be used primarily for personal purposes. Business vehicles follow different rules. The deduction caps at $10,000 per year for married couples filing jointly, or $5,000 for single filers.
Your lender reports your interest directly to the IRS. This makes the process easier for you - one form instead of twelve monthly statements. It also means the IRS can automatically check whether your claimed deduction matches what your lender reported. Mismatches trigger questions, and the IRS now expects those questions to have good answers.
Let's look at a real example. Say you financed $32,000 for a 2025 Toyota Camry at 7.2% for 60 months. Your monthly payment is $638.29. In the first full year, you paid roughly $2,185 in interest and $5,474 in principal.
Your lender sends you Form 1098-VLI showing $2,185 in box 1. You claim $2,185 on Schedule A, line 8d. The IRS computer matches these numbers automatically. Everything clears.
But what happens if the numbers don't match? Say you claimed $2,250 in interest but your Form 1098-VLI shows $2,185. The IRS computer flags the $65 difference. You get a letter asking you to explain the discrepancy or adjust your return.
During 2025, small differences got more lenient treatment under transition relief. Starting in 2026, standard enforcement applies. You need documentation to support any difference between your claimed amount and your Form 1098-VLI.
Common reasons for legitimate differences include:
- Payment timing differences - you made a December payment that posted in January
- Escrow or fee corrections - items initially coded as interest got recategorized
- Partial year reporting - you refinanced mid-year and totals don't align perfectly
- Lender system errors - the form contains a mistake you can document
Your responsibilities as a borrower now include:
- Keep loan statements from all twelve months as backup documentation
- Verify your Form 1098-VLI immediately when you receive it by comparing it to your statement totals
- Report discrepancies quickly to your lender if the form shows wrong amounts
- Save all documentation including the form and your monthly statements for at least three years
- Contact your lender by February 15th if you don't receive Form 1098-VLI
- Request corrected forms formally if you discover errors after filing
Your lender's responsibilities under full enforcement include:
- Track interest payments accurately throughout the calendar year
- Generate Form 1098-VLI for each borrower who paid $600 or more in interest
- Mail your copy by January 31st without exceptions or delays
- File with the IRS by the appropriate deadline based on their filing method
- Correct errors formally by issuing amended forms through proper channels
- Face penalties for late filing, incorrect information, or missing forms
The division of responsibility matters because both sides face consequences for errors now. You might face an adjusted tax bill if your claimed deduction doesn't match reported amounts. Your lender might face IRS penalties for filing errors. This creates pressure on both sides to get the numbers right the first time.
One situation to watch - if you refinanced during 2026, you receive two Forms 1098-VLI. One from your original lender for the interest you paid before refinancing, and one from your new lender for interest paid after. You add both amounts for your total deduction. Make sure both lenders file their forms properly and that you don't miss either one.
What You Need to Do Right Now
Full enforcement means errors create bigger problems than they did during the transition period. Three actions now will protect you when you file your taxes this year and next.
First, verify the Form 1098-VLI you received for 2025 interest. You should have received this form by January 31, 2026. If you haven't received it yet and you paid more than $600 in interest during 2025, contact your lender immediately. Don't wait until you're ready to file your taxes - the deadline to request corrections might have passed by then.
Compare the interest amount on your form to your own records. Pull your monthly loan statements from January through December 2025. Add up the interest portions from all twelve months. Does your total match box 1 on Form 1098-VLI? If yes - good. If no - you need to resolve the difference before filing.
Small differences under $25 might not be worth disputing if your total itemized deductions far exceed the standard deduction. Larger differences require investigation. Contact your lender's customer service and ask them to review your account. They can generate a detailed interest summary that shows how they calculated the amount on your form.
Second, set up tracking for 2026 interest payments. Don't wait until January 2027 to discover your lender made errors. Create a simple spreadsheet or use a folder to save your monthly loan statements as you receive them throughout 2026. Track the interest portion of each payment.
By December 31, 2026, you'll have your own verified total to compare against the form your lender sends. This gives you time to catch and fix errors before tax season rather than discovering problems after you've already filed.
Third, confirm your lender has your current information on file. Form 1098-VLI gets mailed to the address in your lender's system. Verify your mailing address and Social Security number are correct. Log into your online account or call customer service. A five-minute verification now prevents a missing form or IRS mismatch later.
Here's your action checklist for 2026 tax filing:
- Locate your 2025 Form 1098-VLI - you should have received it by January 31, 2026
- Compare the form to your 2025 loan statements to verify accuracy
- Contact your lender immediately if amounts don't match or if you're missing the form
- Request a corrected form if you find errors - don't just use your own numbers
- Save your 2026 statements as you receive them each month
- Update your address with your lender if you moved
- Verify your SSN is correct in your lender's records
- Calculate whether itemizing helps you based on all your potential deductions
Questions to ask your lender right now if you have concerns:
- Did you file Form 1098-VLI for my 2025 interest payments?
- Can you resend my copy if I didn't receive it or lost it?
- How do I request a corrected form if I believe the amount is wrong?
- What documentation do you need from me to support a correction request?
- How long does the correction process take once I submit documentation?
One more situation to prepare for - if you're planning to refinance before year-end 2026, understand you'll receive two forms in January 2027. Track interest paid to each lender separately. Save the final statement from your original lender showing the payoff date and total interest paid through payoff. Save your first statement from your new lender showing when the new loan started and how much interest accrued before year-end.
Common Questions About Current Reporting Rules
What if I paid less than $600 in interest during 2026?
Your lender doesn't have to file Form 1098-VLI if your interest was below $600. You can still deduct the interest if you itemize - you just won't receive the official form. Keep your loan statements as proof of the interest you paid. The IRS might question deductions without supporting forms, so documentation matters more when you're below the reporting threshold.
Do I need to attach Form 1098-VLI to my tax return?
No. You don't file the form itself with your tax return. You use the interest amount from box 1 when you complete Schedule A. Keep the form with your tax records in case the IRS asks for verification during an audit. The IRS already has a copy of the form from your lender - they just want to verify your claimed amount matches what was reported.
What happens if my lender makes a mistake on the form?
Contact your lender immediately if you spot an error. They must file a corrected Form 1098-VLI following standard IRS procedures. Under full enforcement, corrections take longer than they did during the transition period because lenders face penalties for errors. Start the correction process as soon as you discover the problem - don't wait until tax filing season when lenders get overwhelmed with requests.
Can I claim the deduction if I don't receive Form 1098-VLI?
Yes, as long as you have documentation of the interest you paid and you meet all other requirements. Your monthly loan statements serve as backup proof. However, claiming a deduction without a matching Form 1098-VLI on file at the IRS increases your audit risk. The IRS computer expects to see a form for any auto loan interest deduction. Missing forms create questions you'll need to answer with documentation.
Does this apply to vehicle leases?
Some leases qualify if they're structured as financing arrangements. Your leasing company determines whether your lease requires Form 1098-VLI based on how the IRS classifies the lease. If you receive the form, you can deduct the interest portion of your lease payments subject to the same caps as loans - $10,000 for joint filers or $5,000 for single filers.
What if I have multiple auto loans?
You receive a separate Form 1098-VLI for each loan from each lender. Add the interest from all forms together for your total deduction. Remember the deduction caps at $10,000 for joint filers or $5,000 for single filers regardless of how many vehicles you financed. If your combined interest exceeds the cap, you can only deduct up to the maximum amount allowed.
How does refinancing affect my Form 1098-VLI?
When you refinance, your original lender files a form for interest paid before the refinance date. Your new lender files a form for interest paid after refinancing. You add both amounts for your total deduction, subject to the annual cap. Make sure you receive both forms. If either lender fails to file, contact them immediately to request the form.
What if I sold my car during 2026?
You still receive Form 1098-VLI showing interest paid up to your payoff date. That interest remains deductible for the months you had the loan, even though you no longer own the vehicle. The IRS doesn't care whether you still own the vehicle - they only care whether you paid interest on a qualifying loan during the tax year.
What happens if my claimed deduction doesn't match my Form 1098-VLI?
The IRS computer automatically flags mismatches. You'll receive a letter asking you to explain the difference or adjust your return. Small discrepancies might result in an adjusted tax bill with interest on the underpayment. Large discrepancies might trigger a full audit. Always have documentation ready to explain any differences between your claimed amount and the reported amount.
Moving Forward Under Full Enforcement
The transition relief period ended December 31, 2025. Full enforcement of Form 1098-VLI reporting requirements is now in effect. Your lender handles the reporting - they track your interest, file the form, and mail your copy by January 31st each year. Your job is to verify the form when it arrives and use the amount when you file your taxes.
These reporting rules don't change the value of your interest deduction. They create an official system to track and verify the interest you can deduct under the One Big Beautiful Bill Act. The grace period for mistakes has ended. Errors now trigger standard IRS procedures including potential audits and adjusted tax bills.
The one-year transition period gave everyone time to learn the new system. Lenders fixed their reporting processes. Borrowers learned what to expect. Now the system runs at full capacity with real consequences for errors on both sides.
Take the three core actions today. Verify your 2025 Form 1098-VLI if you're filing 2025 taxes now. Set up tracking for 2026 interest payments. Confirm your lender has your current address and correct Social Security number. These steps take less than an hour but prevent hours of frustration during tax season.
The interest on your auto loan gets reported to the IRS just like mortgage interest. This doesn't make your loan more expensive - it makes the tax benefit official and easier to track. But it also makes accuracy mandatory rather than optional.
Check your loan statements this week. Verify your 2025 form if you received one. Set up your tracking system for 2026. These small actions now create clarity when tax time arrives and protect you if the IRS questions your deduction later.
