Thursday, March 3, 2011

GAO on vanished money as taxable income

There was an unfriendly note for victims of foreclosure in Tuesday's big report on duplication in government programs (on which my previous notes here). The short version says, "More information on the types and uses of canceled debt could help IRS limit revenue losses on forgiven mortgage debt."

There's more detail in the report and here. Also, last August GAO published a whole report on the same idea.

It is not what you might call a deeply humane idea.

It's that, although you couldn't pay the mortgage, the house at foreclosure was worth less than the mortgage, you don't live there any more, and the original transaction was signed in a bubbleicious atmosphere of unreality, in many circumstances the tax laws treat forgiveness of this ephemeral debt as though it were cash money paid to you. As the IRS site explains, this is not always an issue for ex-debtors, but sometimes they do end up owing income tax on the amount by which the loan exceeded the value of the house when the lender took it back.

So now GAO thinks the IRS should be looking harder for these situations more of the time to be sure and extract what's due.

So, yes, people who report their transactions and pay their taxes up front shouldn't be hit harder than sneaks, but wouldn't it make sense to focus harder on collecting from taxpayers who have money left with which to pay their taxes?

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