Foreclosure Issues: Elimination of Taxes on Debt from Foreclosure

To-Do List For IRS

Michelle Singletary,

The official appointed to speak out on behalf of U.S. taxpayers has a few major gripes about the Internal Revenue Service. Among them, she believes the agency needs to better protect victims of tax-related identity theft and should get more information out to homeowners about a new law eliminating taxes on debt canceled as a result of foreclosure.

Nina E. Olson, the national taxpayer advocate, issued a summer report to Congress identifying areas of concern the IRS needs to focus on in the 2009 fiscal year.

This year marks the 10th anniversary of the enactment of the IRS Restructuring and Reform Act of 1998, which created the Office of the Taxpayer Advocate to identify problems within the IRS and help taxpayers resolve conflicts.

Olson, who has served as the taxpayer advocate for seven years, works independently within the IRS and is required by law to submit two annual reports to Congress.

As the founder of the Community Tax Law Project, a low-income taxpayer clinic, Olson says it is her experience working with taxpayer disputes that has helped her appreciate the frustration so many people have had with the IRS.

Olson said the creation of the taxpayer advocate office has “substantially improved tax administration and fairness for taxpayers.”

Here are three major areas Olson wants to focus on in 2009:

Tax-related identity theft, which Olson called a serious problem. In one type of scam, an identity thief may file a return using a victim’s Social Security number. The motive is refund fraud. The identity thief will use the personal information belonging to someone else to file a false return, typically early in the filing season before the innocent taxpayer files his or her own legitimate return.

Olson’s report faults the IRS for not having adequate procedures in place to assist victims of identity theft. “While the IRS is reforming some aspects of its approach to identity theft, its procedures for dealing with victims have been a significant part of the problem,” she wrote.

To help alleviate this problem, the IRS is implementing a new servicewide identity theft indicator. However, Olson has concerns about the effectiveness of the system.

Cancellation of debt income. When an individual or business borrows money and the debt is canceled, the borrower generally must include the amount of the canceled debt in gross income. Last year, Congress passed a law giving temporary tax relief to homeowners who had mortgage debt canceled.

Here’s the problem. The tax relief isn’t given automatically. You have to file IRS Form 982 “Reduction of Tax Attributes Due to Discharge of Indebtedness,” and the form has to be attached to the federal tax return. Many people entitled to this tax break aren’t filing the form. Olson said she wants to work with the IRS to get the word out to more people.

IRS collection practices. Olson remains concerned about collection issues, including the seizure of assets before other collection alternatives have been exhausted.

If you are having trouble resolving a tax problem, contact the taxpayer advocate service by calling 1-877-777-4778 or TTY/TDD 1-800-829-4059. The service is free and confidential. For more information online, go to