To the People

The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or TO THE PEOPLE.

Monday, August 20, 2007

IRS to the Foreclosed: Don't Forget You Owe Us Money

The foreclosure wave has just started. It is a mess and will get worse. I don't agree with Hillary Clinton's $1 billion proposal to bail out those who took on bad loans as a bailout would be paid by everyone who took out responsible loans and also renters, who are already disadvantaged by the IRS code.

But the IRS is the shark in the water in this issue, as they tend to be. The IRS view is that if a creditor forgives a loan to a debtor, then the amount of that forgiveness is taxable income to the debtor. Wow and yikes! And how ruthless. As the NY Times reported today,
Two years ago, William Stout lost his home in Allentown, Pa., to foreclosure when he could no longer make the payments on his $106,000 mortgage. Wells Fargo offered the two-bedroom house for sale on the courthouse steps. No bidders came forward. So Wells Fargo bought it for $1, county records show.

Despite the setback, Mr. Stout was relieved that his debt was wiped clean and he could make a new start. He married and moved in with his wife, Denise.

But on July 9, they received a bill from the Internal Revenue Service for $34,603 in back taxes. The letter explained that the debt canceled by Wells Fargo upon foreclosure was subject to income taxes, as well as penalties and late fees. The couple had a month to challenge the charges.

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