Too many times I have seen people come out of bankruptcy still owing taxes that should have been discharged. It happens too frequently
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North Charleston, S.C. (Vocus) October 16, 2007
David Bauman, an Enrolled Agent for JK Harris (http://www.jkharris.com), the nation’s largest tax representation firm, says lenders have been extending loans to borrowers over the last few years that should not have qualified for such loans. He predicts foreclosures will continue to rise across the nation and that this will create “relief of debt” income.
“When taxpayers get a 1099-A or 1099-C notice from their lenders, they should contact a tax professional to see if there is anything that can be done to assist them with getting tax relief on this type of income,” said Bauman.
Borrowers whose debt is reduced or eliminated should receive Form 1099-C at the end of the year. This form must show the amount of debt forgiven and the fair market value of property given up through foreclosure.
“One client I worked with a few years ago was talked out of including his home in his bankruptcy; it was a big mistake. The bankruptcy would have excluded him from having to claim the relief of debt as income,” said Bauman, who joined JK Harris in 2002. “Although a client should always consult their bankruptcy attorney to consider all tax aspects, it is generally recommended that the home be listed in the bankruptcy discharge.”
A bill has recently passed the United States House of Representatives offering relief to taxpayers experiencing relief of debt income that results from a foreclosure. This means that the home must be foreclosed on and the home sold via foreclosure sale for this type of relief to apply to the homeowner. It is important to note that this type of relief is only applicable to personal residences; it does not apply to rental or vacation homes.
Bauman stated that JK Harris couldn’t provide any customer examples on the subject of foreclosure tax relief because the company is not yet seeing customers affected by this type of income. He is expecting that there will be an explosion of taxpayers seeking assistance with this issue later this year and in 2008.
Bauman added that any homeowner going through a bankruptcy should contact their bankruptcy attorney to ask specifically which delinquent tax periods qualify for discharge so that when they come out of bankruptcy, they owe less to the IRS and State. It is also important that they work with professionals to determine how they lost their home.
“Too many times I have seen people come out of bankruptcy still owing taxes that should have been discharged. It happens too frequently,” concluded Bauman.
The IRS recently announced a special new section on its website for homeowners affected by this. This information comes with the reminder that although mortgage workouts and foreclosures have tax consequences, there are special relief provisions available that can help reduce or eliminate tax penalty for these financially strapped borrowers who have lost their homes. Taxpayers will have to wait to see if the bill for foreclosure debt relief passes the Senate and ultimately, the White House.
About JK Harris:
JK Harris & Company, LLC, (http://www.jkharris.com) based in North Charleston, S.C., is the nation's largest tax resolution firm and has served over 200,000 customers since its founding in 1997 by John K. Harris. JK Harris consultants are available to meet with consumers in over 425 locations nationwide by appointment only. The company also provides services for student loan debt, investment fraud, fee-based financial planning, tax return
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