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1/31/12

IRS pursues ex-homeowners who didn t qualify for break - Sacramento Busi…

From the Sacramento Business Journal: http://www.bizjournals.com/sacramento/print-edition/2012/01/27/irs-pursuesex-homeowners.html

IRS pursues ex-homeowners who didn t qualify for break Income exemption on mortgage forgiveness had many exceptions Premium content from Sacramento Business Journal by Mark Anderson, Staff Writer Date: Friday, January 27, 2012, 3:00am PST Related: Banking & Financial Services, Residential Real Estate, Sacramento, Roseville, Granite Bay, Accounting & Consulting

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Sacramento-area accountants say they are seeing a new kind of housing hangover: IRS letters seeking back taxes from homeowners who benefited from short sales, loan modifications and foreclosures. A lot of folks struggling with underwater homes sold them and assumed they were covered by a temporary law that allowed tax-free mortgage debt forgiveness. But it turns out that some who did not qualify for the tax relief took it anyway. Accountants say they are seeing the problems starting to surface now as people are getting letters from the Internal Revenue Service. And in many cases, those letters from the IRS are bills for taxes owed on unclaimed income. We are seeing and I am hearing about people who are shocked that they may owe tax on debt they thought had been forgiven, said Donna Sauter, partner and tax principal at Ueltzen & Co. LLP in Sacramento. The Mortgage Forgiveness Debt Relief Act of 2007 offered relief to victims of the unfolding mortgage crisis. It expires at the end of this year. bizjournals.com/sacramento/print-edition/…/irs-pursues-ex-homeowners.ht…

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1/31/12

IRS pursues ex-homeowners who didn t qualify for break - Sacramento Busi…

The act allows taxpayers to exclude from their income the amount of mortgage forgiveness they get in a foreclosure, debt modification or short sale. But there are exceptions — lots of exceptions. The relevant IRS publication runs more than 20 pages. The law allows a tax exemption only for mortgage debt forgiveness on the original mortgage to acquire the property or for a second mortgage that was principally used for substantial improvements on the property, such as a new roof or an addition. A lot of people missed that “original loan” qualification requirement to use the exception, Sauter said. People who refinanced the original purchase loan — or people who took out an equity loan for something other than home improvement — may not be eligible for the tax break. And even families who used a refinance to do home improvements may have to show receipts for that work. Also, the debt relief only applies to a primary personal residence, and not any kind of secondary or income property. Some of the IRS letters just seek more information to see if a homeowner qualified for the tax exception and to prove it. Others assess income tax on the forgiven debt, along with a penalty and accrued interest, Sauter said. Finding out they may owe money is a second blow for people who already lost a home, she said. “They think they qualified for all these exceptions, and they didn t.” In many cases, the people now seeking help from a tax accountant didn t do so when they were going through the short sale or foreclosure, often because they were short of money then, Sauter said. All too often, people take tax advice from a mortgage broker, a real estate agent or a relative, said Fred Crooks, a principal with CPA Corp. in Granite Bay. “Not to throw real estate agents under the bus, but they don t know that they don t know what they don t know about tax law,” said Steve McCormick, a partner with Scott & Baldwin CPAs Corp. in Roseville. People who should have claimed the forgiven debt as income but did not claim it tend to find out their error several years down the line. In some cases, taxpayers failed to recognize that the forgiveness was taxable because they received an IRS 1099 form from their bank late or not at all. The lender is required to send the form to the borrower s last known address, but that may be the home the borrower left after a short sale, McCormick said. The IRS gets a notice from the lenders who issue a 1099 to a borrower, and the IRS will notice that a taxpayer didn t report it, said Jesse Weller, spokesman with the IRS in Oakland. “Good record-keeping is essential,” he said. Mark Anderson covers banking, finance, accounting, technology, telecom, venture bizjournals.com/sacramento/print-edition/…/irs-pursues-ex-homeowners.ht…

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IRS pursues ex-homeowners who didn t qualify for break - Sacramento Busi…

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IRS pursues ex-homeowners who didn’t qualify for break