Senators Urge IRS To Relieve Tax Burden On Home Loan Debt

by Mike Godfrey, Tax-News.com, Washington

17 September 2007

Members of the US Senate Finance Committee are urging the US Treasury Department and Internal Revenue Service to take action to ensure that working families who lose their homes to foreclosure face more reasonable, accurate tax bills for their home loan debt forgiveness.

“Working families who lose their homes are getting hit with huge tax bills,” explained Chuck Grassley, ranking member of the Committee.

“Some of those bills are unfairly high and even inaccurate. The IRS needs to take steps to ensure the accuracy of the bill in the first place. Then the IRS should offer the taxpayer every opportunity to negotiate the size of the bill and a fair payment plan. The agency has plenty of authority to treat taxpayers reasonably in these situations. It needs to use that authority to serve taxpayers.”

Grassley and fellow Finance Committee members Sens. Gordon Smith of Oregon and Pat Roberts of Kansas wrote to the Treasury secretary to urge these changes.

The letter directs the Treasury Department to take immediate steps to encourage working families that face mortgage repayment difficulties to submit (and have the IRS accept) offers in compromise that will either eliminate or reduce the taxes that they owe due to cancelled mortgage debt on a primary residence.

The Senators' concerns over the issue have been heightened by a recent article in the New York Times which described the case of a Pennsylvania man who could not keep up payments on his $106,000 mortgage. When his bank foreclosed and wiped his debt slate clean, he was hit with a $34,603 back tax bill because the IRS considered the cancelled debt to be income and therefore taxable. He was also assessed for penalties and late fees.

President Bush has proposed that cancelled mortgage debt on a primary residence should not be treated as income, noting in a recent speech that: “When your home is losing value and your family is under financial stress, the last thing you need to do is to be hit with higher taxes.”

Bush has expressed support for legislation introduced by Senator Debbie Stabenow (D - Mi) known as the Mortgage Relief Act, which would amend the tax code to prevent the IRS from taxing homeowners who have had part or all of their debt forgiven.

The President has said that similar legislation being introduced by Rob Andrews (D - NJ) and Ron Lewis (R - KY) in the House of Representatives is also "positive".

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