Mortgage Lenders Issuing Botched 1099s To Foreclosed Homeowners For "Debt Cancellation" Income, Say Senators

MarketWatch.com reports:

• The IRS should ensure that families who are losing their homes to foreclosure get accurate tax bills and have a chance to negotiate the size of the bill as well as a fair payment plan, three U.S. senators said Friday. "The agency has plenty of authority to treat taxpayers reasonably in these situations," said Sen. Charles Grassley, R-Iowa, in a statement. "It needs to use that authority to serve taxpayers." Grassley sent a letter urging the changes to Treasury Secretary Henry Paulson. The letter was also signed by Sens. Gordon Smith, R-Ore., and Pat Roberts, R-Kans. Grassley, the top Republican on the Senate Finance Committee, said families are being hit with "huge" tax bills.

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• "If the IRS issues simple procedures for taxpayers to file an offer in compromise -- and undertakes a significant program of outreach to taxpayers, practitioners and lenders -- much good can be accomplished immediately," the senators wrote to Paulson.

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• Separately, Grassley and the others wrote that lenders are providing taxpayers inaccurate 1099 forms for the amount of debt forgiveness. "The IRS should be aggressively educating lenders, practitioners and affected taxpayers to ensure that accurate 1099s are being provided," they wrote.

For more, see Tax relief urged for families who lose homes.

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For one story illustrating the problem homeowners may face after losing a home to foreclosure when a foreclosing mortgage lender issues an incorrect Form 1099 in reporting the amount of "debt cancellation income" from a foreclosure sale, see Foreclosing Mortgage Lender Screw-Up Results In Whopping IRS Tax Bill For Ex-Homeowner.

Go here for selected posts with information to assist homeowners, accountants, and income tax preparers in minimizing or altogether avoiding any income tax on "cancellation of debt" from foreclosure or "short sales."

(Editorial Note: Hopefully, all this becomes moot if Congress passes a law that President Bush recently proposed that, as I understand it, would provide a blanket elimination of any homeowner income tax liability on "cancellation of debt" from foreclosures and short sales. But until Congress acts, be informed that current law already allows a homeowner who has lost a home to foreclosure (or sold a home using a "short sale") to reduce or possibly eliminate completely the income tax in many situations, notwithstanding all the incomplete or incorrect information being reported by some "real estate experts" to the contrary.) short sale income tax