QUESTION:
Recently, I lost my home to foreclosure because my adjustable rate mortgage took off and I was not able to keep up with the payments. I have heard that there are tax consequences for losing a home in foreclosure and I wondered if there was anything I could do about it.
ANSWER:
You are correct that there are tax consequences when you lose a home to foreclosure. When you borrow money to purchase a home, you do not have to include that money as income because you are required to pay it back. However, when you are foreclosed and the bank is unable to collect the entire amount owed, they often forgive the amount you still owe. Since you are not required to pay all of the loan back, the portion that you still owe becomes income to you which is taxable. Of course, many times homeowners have a substantial amount of equity in a home when it is foreclosed and they have a “loss.” This loss is not deductible on your taxes, however. The year your debt is forgiven, you will receive a 1099-C from the lender showing the amount of the debt you still owed and the fair market value of the house. Those values are used to determine the amount of taxable income you have for the forgiven debt. The lender also provides the 1099-C to the IRS, so if you do not include it on your tax return, the IRS will come knocking looking for the additional tax. If you owe this additional tax, we can assist you in negotiating a lower amount to the IRS or help you set up a payment plan to make a comfortable monthly payment.
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I have just completed a series on the IRS Summons and Third-party summons. If you have received a summons, that means the IRS is desperately trying to get information from you (or someone else) to assist them in determining your financial status and your ability to pay your taxes. If you don’t assist them in providing information, then they will find it another way, and that might not be the most beneficial way for you.
For more information about the IRS summons and what they mean, see the previous posts in this series:
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The IRS will hold any person liable for the trust fund recovery penalty who was responsible for, meaning they had the duty to account for, collect, and pay over the trust fund taxes to the government.
A person includes officers and employees of corporations and partners and employees of partnerships, corporate directors and shareholders, other corporations, sureties and lenders. You don’t necessarily have to have a corporate title to be held liable for the trust fund recovery penalty. The person may be a "peion" or a bottom level employee, however if they are responsible for collecting/withholding the tax money, reporting it and paying it they will be liable for the trust fund recovery penalty.
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The Trust Fund Recovery Penalty is based on the Internal Revenue Code Section 6672 which states that:
Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfuly pails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax on the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over.
What does all that legal mumbo-jumbo mean? Well it basically means that if you participate in a business that is required to collect, report and pay income taxes for its employees you are required to collect, report and pay those income taxes. While that sounds obvious, a lot of times, businesses are faced with the fact that because of their current cashflow situation, they can either pay their employee’s income taxes to the IRS or they can pay their employee’s payroll to the employee.
If you fail to collect, report and pay those withheld taxes, the IRS may assess the trust fund recovery penalty against you and you will be liable for the "trust fund" portion of those income taxes.
The purpose of the trust fund recovery penalty is two-fold according to the Internal Revenue Manual:
- The first purpose is to encourage the prompt payment of withheld and other collected (trust fund) taxes; and
- Second, to facillitate collection of such taxes from secondary sources.
Many times, the IRS will not be able to collect the taxes from the business because the business has failed and shut down, however if the payroll taxes were not paid, other people will be liable for at least the trust fund taxes and the IRS may attempt to collect those taxes from them personally.
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This post is a follow-up to two previous posts regarding summons issued by the IRS to obtain information regarding a taxpayer’s assets or financial information. I am attempting to answer the question that most people want to know - what kind of trouble can I get into for not responding to a summons, or what happens if I ignore the summons?
As I stated in a previous post, the IRS typically doesn’t begin to issue summons until the taxpayer has proven that they are not willing to work with the IRS. Sometimes, this is an accident on the part of the taxpayer because they didn’t understand the letters they were receiving from the IRS, or they did not receive any of the letters the IRS mailed because they moved or otherwise didn’t get the mail.
Typically, the IRS will want to obtain information from you the "easy way" by getting it directly from the taxpayer. If this method is not working then the IRS is "forced" to issue a summons. If you do not comply with the summons, the IRS my take further legal action against you including an enforcement suit, a contempt hearing, and obtaining a contempt order.
As I have stated previously on this blog, the IRS would like to work everything out with the taxpayers, however, the taxpayer must be willing to provide information and work with the IRS. Generally, I have found that the harder you make the work for the IRS, the harder the IRS is going to make it for you.
What are your rights as a taxpayer when a third party summons is issued?
Well, first of all, you must receive notice of the summons. Usually this is done by mail and comes to you within a few days after the summons is served on the third party. Next, if you feel that the summons is unnecessary or issued improperly, you may file a motion to quash the summons.
What is quash, you ask? Well, Black’s Legal Dictionary defines "quash" as meaning "to annul or make void." That’s a suprisingly simple legal definition, but basically, if you were successful in quashing the summons, the summons would no longer be valid and the third party would not be under any compulsion to provide information to the IRS.
There is a strict 20 day time limit you have to move to have the summons quashed.