In October of 2008 I received notice from the IRS that a tax audit was being done on my 2006 tax year filing. After you get a notice like this from the IRS you then set up an appointment to see the tax examiner who will be handling your case. My appointment was scheduled for November at the Deerfield Beach IRS office in Florida and I was told which documents to bring for the auditor to look at. I had not reported my entire income on the Form 1040 and that is what had triggered the examination. I would not have had to face this situation if I had not totally relied on Turbo Tax without checking things adequately. If you have to face an ordeal like this, remember that the IRS wants your money, not your excuses.

The IRS sent my adjusted tax return in January of 2009 and told me that I owed more than $20,000 dollars in unpaid taxes. That did not even include the 8 percent interest on top of a $3,200 dollar penalty. When I read that I began to feel very desperate.

I had been seeing these TV commercials for a company called American Tax Relief which had very well known people selling the idea that this company could help you reduce any tax liability you might have. I called the number on the screen and spoke with one of their slick sales people whose name was Bill. I told him my story and he confidently assured me that his company could greatly reduce my tax liabilities. What a relief! In order to get their service started, and also get the IRS off of me, they faxed me a power of attorney that I was supposed to sign and return to them. I gave them my bank account number and all the necessary information to handle the one-time 3,900 dollar fee. I told them to go ahead and fax me the paperwork and I agreed to the service.

Even though I had already agreed to hire them, I began to have second thoughts and went online to see if there were any complaints against American Tax Relief. I was really surprised to find hundreds of complaints against them. You can visit www.ConsumerComplaints.com to see it for yourself. The Better Business Bureau has given them an “F” rating in Southern California. After I read the complaints I put an immediate stop payment on the telephone check that I had given to American Tax Relief. Then I got a call from Bill who wanted to know why my fax of the power of attorney had not reached them. I let him know that I no longer wanted their service and that put an end to that situation.

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If a creditor writes off your debt, or even if you settle that debt with your creditor, the IRS may still count the amount as taxable income.

If you work out a deal to settle with a creditor for any less money than the exact amount that you owe, or if the creditor writes off the debt, the IRS may still regard you as owing money. The IRS will consider the forgiven amount of the debt as income, and you will continue to owe income taxes on it.

How does this work? Creditors will often wait for a pre-determined period of time after a default – one year, for example, or two years – to write off the debt. At this point, the creditor will stop all efforts to collect the debt, declare it as noncollectable, and in order to reduce the tax burden, will declare the uncollected amount to the IRS as what is considered lost income. This same standard is used when debt reductions are negotiated. The amount left unpaid will be reported by the creditor to the IRS also as lost income.

However, the IRS will naturally still want this money taxed, and it will expect the forgiven debtor to pay those taxes. Because the amount of the debt was reduced, and you are no longer expected to pay the forgiven amount, the IRS will treat that amount as gained income, and expect you to pay your income taxes on it.

This standard is also in operation for those debts that you owe after a property repossession or a foreclosure on a house. The law can seem inordinately cruel in these situations. Someone who has lost their home due to foreclosure not only has to suffer through the loss, but will be expected to pay income taxes on an amount of the forced sale. This amount, called the deficiency, is the difference between the amount that was originally owed to the lender, and the amount for which the lender was finally able to sell the property.

However, a 2007 congressional resolution eased this standard for some loans that were forgiven in whole or in part between the years of 2007 and 2012. If the amount of the deficiency arises from the sale of a primary residence (your current home), then the law will offer you some tax relief. These are the rules for when this does or does not apply:

Loans used for a primary residence – if you secured the loan through your primary residence, and used the loan to buy or to improve the house, you will be able to exclude as much as two million dollars of the forgiven debt. You will not have to pay taxes on the amount of the deficiency.

Loans on any other real estate – If a mortgage is secured through any property that is not your own home (like a vacation home, for example), and you default on this, you will continue to owe a tax on the amount of the deficiency.

A default on a loan secured through a primary residence but not used to buy it or to improve it will still leave you owing taxes on a deficiency.

If you find yourself not qualifying for any of the tax exceptions under these standards, there may be other relief available to you. If you can show proof that you were not legally solvent, you will not be held liable for paying taxes.

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Debt Forgiveness and Mortgages

If you had all or part of a mortgage forgiven during the last three tax years, you may be able to avoid paying taxes on the forgiven mortgage debt. A law passed in 2007 called the Mortgage Forgiveness Debt Relief Act allows otherwise taxable mortgage forgiveness to be tax free up to $2 million dollars.

Now if you file separately from your spouse, you can only claim half of the limit yourself. But joint filers can take the full $2 million. Restructure of mortgage debt is one case where you might need this tax benefit in addition to debt that was eliminated through a foreclosure. One exception is debt consolidated from other sources that was originally used for other purposes unrelated to your home.

File IRS Form 982 with your tax return to claim the debt forgiveness. The debt forgiveness is for primary residences only as the Form 982 describes. To find the amounts of debt that was forgiven for the tax year, look for a 1099-C from the mortgage holder. This tax form will provide the total amount information that you need.

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Tax Relief – 411 Tax Relief

If you own back taxes and need to settle IRS tax debt, 411 Tax Relief has the services you need. Remove wage garnishments, stop additional penalties and interest, and avoid seizures of valuable assets.

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If you have an upcoming audit and do not know the important points of tax law, 411 Tax Relief has the experts available to assist you. Their tax expertise has helped hundreds of thousands of individuals and couples just like you with their audits and past IRS debt issues.

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And 411 Tax Relief offers free consultations through this limited online offer. So contact them today if the government has a levy against you, your payroll checks are being garnished, you can’t pay the IRS for taxes due this year, you own a business and did not pay payroll taxes, you have failed to file a return in the past or you just received an audit notice.

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