|
IR-2007-159, Sept. 17, 2007 WASHINGTON — The Internal Revenue Service unveiled a special new
section today on IRS.gov for people who have lost their homes due to
foreclosure. The IRS also reassured homeowners that, although mortgage
workouts and foreclosures can have tax consequences, special relief
provisions can often reduce or eliminate the tax bite for financially
strapped borrowers who lose their homes.
The new section of IRS.gov includes a variety of information,
including a worksheet 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
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 IRS urges struggling homeowners to consider their options carefully before giving up their homes through foreclosure.
Under the tax law, if the debt wiped out through foreclosure exceeds
the value of the property, the difference is normally taxable income.
But a special rule allows insolvent borrowers to offset that income to
the extent their liabilities exceed their assets.
The IRS 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 urges borrowers to check the Form 1099-C carefully. They
should notify the lender immediately if any of the information shown on
their form is incorrect. Borrowers should pay particular attention to
the amount of debt forgiven (Box 2) and the value listed for their home
(Box 7).
The IRS also reminds lenders of their obligation to provide accurate
information on the Form 1099-C. 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.
The IRS normally initiates these follow-up contacts by sending the
borrower a notice. The tax agency urges borrowers with questions to
call the phone number shown on the notice. The IRS also urges
borrowers who wind up owing additional tax and are unable to pay it in
full to use the installment agreement form, normally included with the
notice, to request a payment agreement with the agency.
Related Item:Questions and Answers on Home Foreclosure and Debt Cancellation | 
