IR-2007-159, Sept. 17, 2007WASHINGTON - The Internal Revenue Service unveiled a special new section
today on IRS.gov for people who have lost their homes due to foreclosure. The
IRS also reassured homeowners that, although mortgage workouts and foreclosures
can have tax consequences, special relief provisions can often reduce or
eliminate the tax bite for financially strapped borrowers who lose their homes.
The new section of IRS.gov includes a variety of information, including a
worksheet designed to help borrowers determine whether any of the
foreclosure-related relief provisions apply to them. For those taxpayers who
find they owe additional tax, it also includes a form they can use to request a
payment agreement with the IRS. . In some cases, eligible taxpayers may qualify
to settle their tax debt for less than the full amount due using an
The IRS urges struggling homeowners to consider their options carefully
before giving up their homes through foreclosure.
Under the tax law, if the debt wiped out through foreclosure exceeds the
value of the property, the difference is normally taxable income. But a
special rule allows insolvent borrowers to offset that income to the extent
their liabilities exceed their assets.
The IRS cautions that under the law, relief may be limited or unavailable in
some situations where, for example, part or all of a home was ever used for
business or rented out.
Borrowers whose debt is reduced or eliminated receive a year-end statement
(Form 1099-C) from their lender. By law, this form must show the amount of
debt forgiven and the fair market value of property given up through
foreclosure. Though the winning bid at a foreclosure auction is normally a
property's fair market value, it may not necessarily reflect its true value in
The IRS urges borrowers to check the Form 1099-C carefully. They should
notify the lender immediately if any of the information shown on their form is
incorrect. Borrowers should pay particular attention to the amount of debt
forgiven (Box 2) and the value listed for their home (Box 7).
The IRS also reminds lenders of their obligation to provide accurate
information on the Form 1099-C. By law, the lender must send a copy of this
form to the IRS. IRS follow-up contacts with taxpayers involved in foreclosure
are based largely on the information reported on this form, and whether it
conflicts with information provided by the taxpayer on their federal income tax
The IRS normally initiates these follow-up contacts by sending the borrower a
notice. The tax agency urges borrowers with questions to call the phone number
shown on the notice. The IRS also urges borrowers who wind up owing additional
tax and are unable to pay it in full to use the installment agreement form,
normally included with the notice, to request a payment agreement with the
Related Item:Questions and Answers on Home
Foreclosure and Debt Cancellation