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IRS Offers Tax Advice To Struggling Homeowners

by Mike Godfrey,, Washington

19 September 2007

The US Internal Revenue Service has responded to accusations that it is burdening taxpayers who have had their homes foreclosed upon with unwanted tax bills by launching a new section of its website, advising homeowners who are struggling to keep up mortgage payments that tax relief may available in certain circumstances.

The new section of includes information designed to help borrowers determine whether any of the foreclosure-related relief provisions apply to them. For those taxpayers who find they owe additional tax, it also includes a form that they can use to request a payment agreement with the IRS. In some cases, eligible taxpayers may qualify to settle their tax debt for less than the full amount due, using an offer-in-compromise, the agency stated.

According to the IRS, under the tax law, if the debt wiped out through foreclosure exceeds the value of the property, the difference is normally taxable income. A special rule allows insolvent borrowers to offset that income to the extent that their liabilities exceed their assets. However, the IRS has urged struggling homeowners to consider their options carefully before giving up their homes through foreclosure, and the agency cautions that under the law, relief may be limited or unavailable in some situations where, for example, part or all of a home was ever used for business or rented out.

Borrowers whose debt is reduced or eliminated receive a year-end statement (Form 1099-C) from their lender. By law, this form must show the amount of debt forgiven and the fair market value of property given up through foreclosure. Though the winning bid at a foreclosure auction is normally a property’s fair market value, it may not necessarily reflect its true value in some cases.

The IRS also urged borrowers and lenders to check that Form 1099-C is completed accurately. By law, the lender must send a copy of this form to the IRS. IRS follow-up contacts with taxpayers involved in foreclosure are based largely on the information reported on this form, and whether it conflicts with information provided by the taxpayer on their federal income tax return.

Members of the US Senate Finance Committee have criticised the IRS for not giving homeowners enough opportunity to negotiate their tax bills, and they have called on the US Treasury Department and IRS 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.

President Bush is also supporting legislative efforts to change the US tax code to stop the IRS from taxing homeowners who have had part or all of their debt forgiven on their primary residence.

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