IRS Bad Guy Image Dwindling?

by Florida's #1 Mortgage Planner on January 7, 2009

Apparently, the IRS isn’t always the “bad guy”, and you may want to take their advice if you owe taxes right now.  The IRS Commissioner, Doug Shulman, encouraged taxpayers to take advantage of several new tax credits and deductions this filing season along with announcing a major enhancement to the Free File program that will allow nearly all taxpayers to e-file for free and and get their refunds faster.

“With so many people facing financial difficulties, we want taxpayers to get all the tax credits they’re entitled to as quickly as they can,” Shulman said. “In addition, we are creating new protections to help people trying to meet their tax obligations. The IRS will do everything it can to help during these tough times.”

“We need to ensure that we balance our responsibility to enforce the law with the economic realities facing many American citizens today,” Shulman said. “We want to go the extra mile to help taxpayers, especially those who’ve done the right thing in the past and are facing unusual hardships.”

That’s sounds like a far cry from what most people have pictured the IRS to be like.  I, for one, am glad to see the IRS taking the intitiative to help those whom have fallen behind, though they also walk a fine line between doing what is right and creating moral hazard, a subject the Fed and Tresaury have brought to light with their disregard for it.

Among the areas where the IRS can provide assistance:

  • Postponement of Collection Actions: IRS employees will have greater authority to suspend collection actions in certain hardship cases where taxpayers are unable to pay. This includes instances when the taxpayer has recently lost a job, is relying solely on Social Security or welfare income or is facing devastating illness or significant medical bills. If an individual has recently encountered this type of financial problem, IRS assistors may be able to suspend collection without documentation to minimize burden on the taxpayer.
  • Added Flexibility for Missed Payments: The IRS is allowing more flexibility for previously compliant individuals in existing Installment Agreements who have difficulty making payments because of a job loss or other financial hardship. The IRS may allow a skipped payment or a reduced monthly payment amount without automatically suspending the Installment Agreement. Taxpayers in a difficult financial situation should contact the IRS.
  • Additional Review for Offers in Compromise on Home Values: An Offer in Compromise (OIC), an agreement between a taxpayer and the IRS that settles the taxpayer’s tax debt for less than the full amount owed, may be a viable option for taxpayers experiencing economic difficulties. However, the equity taxpayers have in real property can be a barrier to an OIC being accepted. With the uncertainty in the housing market, the IRS recognizes that the real-estate valuations used to assess ability to pay may not be accurate. So in instances where the accuracy of local real-estate valuations is in question or other unusual hardships exist, the IRS is creating a new second review of the information to determine if accepting an offer is appropriate.
  • Prevention of Offer in Compromise Defaults: Taxpayers who are unable to meet the periodic payment terms of an accepted OIC will be able to contact the IRS office handling the offer for available options to help them avoid default.
  • Expedited Levy Releases: The IRS will speed the delivery of levy releases by easing requirements on taxpayers who request expedited levy releases for hardship reasons. Taxpayers seeking expedited releases for levies to an employer or bank should contact the IRS number shown on the notice of levy to discuss available options. When calling, taxpayers requesting a levy release due to hardship should be prepared to provide the IRS with the fax number of the bank or employer processing the levy.

So, those of you in dire straits may have some options.  Keep in mind that if you had been foreclosed upon, or even sold your property in a short sale, there may be a huge tax burden awaiting you.  Typically, as in the past (waived for 2007), the difference in what you owed and what the home transferred for was considered imputed income and taxable as income.  I may have overlooked it (or simply forgot), but I have not seen where the IRS has waived that type of taxable income for 2008. Visit www.irs.gov for more information.

Update:  I did some more research and I apparently missed this somewhere.  Eligible homeowners can exclude debt forgiven on their principal residence if the balance of the loan was less than $2 million. The limit is $1 million for a married person filing a separate return.  Not sure about short sales, but I imagine they fall under this ruling.

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