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Short Sale Debt Forgiveness Tax Relief

Tax Relief for Short Sale Debt Forgiveness

Short Sale Tax Relief

Exemption for Tax Liability Created by Short Sale Debt Forgiveness

The Budget Bill signed into law by President Obama on December 18th, 2015, has received a lot of coverage in the news for many reasons. One of the good thing hidden in the Bill is that The Mortgage Forgiveness Debt Relief Act, which had expired in 2014, has been retroactively extended through 2016. Let’s take a look at why further relief is necessary when debt is forgiven through short sale.

Debt Forgiveness is a Taxable Event

In this world, very few people are strangers to debt. Whether it is unsecured debt such as credit cards or student loans, or secured debt such as a mortgage on real estate property or car loan, almost everybody owes somebody else money. However, lenders do not always successfully collect debts owed to them. In these cases, the lender may elect to cancel all or part of the debt of the borrower.

With unsecured debt, the lender might not be able to collect the debt or may simply give up on trying to collect. With secured debt, the lender will usually chose to foreclose or repossess the property, or allow a short sale as discussed below.

What many people do not know, is that the forgiveness, discharge or cancellation of debt (whichever term you chose to use), is generally a taxable event. The IRS expects people to pay taxes on the difference between the amount they owed and the amount they actually paid. How does the IRS know? Because the lender is required by Federal Law to file Form 1099-C “Cancellation of Debt”, for any debt forgiveness greater than $600. the 1099-C contains pertinent information such as the borrower and lender identification, amount of debt forgiven and date of discharge. you are then required to show the amount of forgiven debt as income on Form 982 and submitted with your Form 1040 “Income Tax Return”.

How Does Debt Forgiveness Tax Impact Short Sale?

In a Short Sale, the lender allows the property owner and borrower to sell the property for less than they owe, and forgive the remainder of the debt, in an attempt to save themselves the time and cost of foreclosure and property maintenance. Technically, this debt forgiveness would be a taxable event as discussed above.

However, The Mortgage Forgiveness Debt Relief Act shields homeowners from tax liabilities created by mortgage debt that is forgiven due to Short Sale of a principal residence (as well as debt forgiven through mortgage modification or deed in lieu of foreclosure). Up to $2,000,000 of forgiven debt is eligible for tax exclusion.

Is Tax Relief for Short Sale Debt Forgiveness Fair?

Whether the forgiveness is fair or not is up for debate, but it definitely makes sense. People seeking Short Sale to avoid foreclosure do not have the money to pay their mortgage. How can the IRS expect the borrower to pay taxes on money they couldn’t pay? With the great number of financially distressed properties in this housing bubble, they can’t.

Consult a Professional

You need to make sure you are making use of the right professionals so that you do not pay the price at a later date. Your account should be consulted whenever a large scale taxable event occurs; such as the forgiveness of thousands of dollars or more in debt. They will need this information to accurately file your tax return. Your real estate attorney needs to make sure that the lender provides you with a 1099-C that is complete and accurate. Finally, you need to make sure that your team is communicating and exchanging information efficiently.

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Should unemployed taxpayer make offer in compromise with IRS?

Making an Offer in Compromise When Unemployed – IRS Tax Debt Relief

Should I Make an Offer in Compromise While Unemployed?

Unemployment as a Factor for Offer in Compromise

An Offer in Compromise is one of the many tools in the tax debt resolution toolbox. An Offer in Compromise is is essentially an offer to make a lump sum payment, or 24 monthly payments to the IRS in an amount less than the entire tax debt amount, which the IRS can choose to accept in full satisfaction of the tax debt. One of the main factors for the IRS to accept or deny an Offer in Compromise is the taxpayer’s “reasonable collection potential”. It would make sense that unemployment would lower ones collection potential, and increase the likelihood of the IRS accepting an Offer in Compromise, right? Well, the answer might surprise you.

First, let us take a look from the perspective of an employed person making an Offer in Compromise to the IRS. An employed person makes X dollars. The IRS knows this person made X dollars last month, X dollars this month, and will likely make X dollars next month. The employed persons collection potential is fairly certain. The IRS can look at the level of income and determine if the offer they made is reasonable.

The income of an unemployed person is less certain. If a person made $100,000 a year last year but is currently unemployed, who is to say they won’t go right back to making  decent income next month or next year, or some time after the offer in compromise is accepted? Perhaps they will make even more money than before. Perhaps if the IRS holds out, they will be able to get payment in full for your tax liability, maybe even garnish your wages directly. The bottom line is that unemployment adds another factor for the IRS to consider when evaluating an offer in compromise; a factor that can work against the taxpayer!

How Can G&G Law, LLC Help Unemployed Taxpayers with Tax Debt?

Just because you are unemployed does not mean that your offer in compromise will get rejected. As competent and experienced tax resolution attorneys, we can lessen the affect unemployment has on the offer in compromise consideration process by:

  • explaining to the IRS that employment in the near future is not likely;
  • finding and presenting evidence of a loss in future earning capacity; and/or
  • offering the IRS a reason why future employment will not affect collection potential.

Should Unemployed Taxpayers Make an Offer in Compromise?

Nothing prevents an unemployed person from making an offer in compromise. However, while you CAN make an offer while unemployed, the more important question is: SHOULD you?

Every case is different. The reason one owes a tax debt to the IRS, how long they have owed it, the amount of the tax debt, and the financial circumstances of the taxpayer are different in every situation. Without reviewing the totality of the circumstances, it is impossible to make a recommendation. However, there are other options for settling tax debt besides an offer in compromise. You can have your accounts marked “Currently Not Collectible” due to unemployment, which will stop the IRS from taking your savings until your financial situation improves. You can get set up with a Partial Payment installment Agreement that is manageable with your limited financial capacity. If your finances are totally unmanageable, you may even be a candidate for bankruptcy.

Before proceeding with any tax resolution method with the IRS, you should consult a tax resolution professional. Only someone with a full understanding of your situation and a complete knowledge of IRS policy and procedure can properly advise you on how to proceed. If you need to resolve a tax debt with the IRS, we are here to help. We are not simply some tax hotline from an infomercial: Call 203-740-1400 to speak to a tax resolution attorney.

 

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