Letter to The Honorable Henry Paulson Jr., Secretary, U.S. Department of Treasury
Letter
GRASSLEY, COLLEAGUES URGE IRS TO HELP TAX BURDEN OF HOME LOAN DEBT FORGIVENESS ON WORKING FAMILIES
Sen. Chuck Grassley, ranking member of the Committee on Finance, along with two fellow Finance Committee members, is urging the Treasury Department and Internal Revenue Service (IRS) to take action to ensure that working families who lose their homes to foreclosure face more reasonable, accurate tax bills for their home loan debt forgiveness.
"Working families who lose their homes are getting hit with huge tax bills," Grassley said. "Some of those bills are unfairly high and even inaccurate. The IRS needs to take steps to ensure the accuracy of the bill in the first place. Then the IRS should offer the taxpayer every opportunity to negotiate the size of the bill and a fair payment plan. The agency has plenty of authority to treat taxpayers reasonably in these situations. It needs to use that authority to serve taxpayers."
Grassley and fellow Finance Committee members Sens. Gordon Smith of Oregon and Pat Roberts of Kansas wrote to the Treasury secretary to urge these changes. The text of their letter follows here. Also pasted below is the text of a New York Times story describing the post-foreclosure tax problem.
September 13, 2007
The Honorable Henry Paulson Jr
Secretary
U.S. Department of Treasury
1500 Pennsylvania Avenue, NW
Washington, DC 20220
Dear Mr. Secretary:
We are writing to you regarding the President's recent proposal to provide that cancelled mortgage debt on a primary residence is not counted as income. Many Americans are facing real financial difficulties because of increased mortgage payments. These families are often confronting the reality of defaulting and losing their home or seeking to work with lenders to significantly reduce the loan amount. As these families struggle to reduce their home loan debt they are hit by taxes that are due to debt forgiveness from the lender. The President is right to seek relief for these working families.
While the Congress considers the President's proposal, Americans shouldn't have to wait to get the relief that is needed right now. We strongly urge the Treasury Department to take immediate steps to encourage working families that face the difficulties that the President outlined in his speech on August 31, 2007, to submit (and have the Internal Revenue Service [IRS] accept) offers in compromise that will either eliminate or reduce the taxes that they owe due to cancelled mortgage debt on a primary residence.
Congress has granted IRS broad authority to compromise a tax liability under Section 7122. Perhaps most relevant here is that the Treasury Department has interpreted that authority such that ". . . IRS may compromise to promote effective tax administration where compelling public policy or equity considerations identified by the taxpayer provide a sufficient basis for compromising the liability." Treas. Regs. 301.7122-1(b)(3)(ii). President Bush on August 31, 2007, made the case himself for a compelling public policy rationale, stating: "When your home is losing value and your family is under financial stress, the last thing you need to do is to be hit with higher taxes."
We recognize that it would be simpler to change the law to provide relief; however, the top goal we all share is providing relief for working families in financial stress as quickly as possible. If the IRS issues simple procedures for taxpayers to file an offer in compromise -- and undertakes a significant program of outreach to taxpayers, practitioners and lenders - much good can be accomplished immediately.
Taxpayers are also facing an additional problem in that lenders are providing taxpayers inaccurate 1099s for the amount of debt forgiveness as was recently reported by the New York Times. The IRS should be aggressively educating lenders, practitioners and affected taxpayers to ensure that accurate 1099s are being provided. Too often the IRS emphasizes dealing with problems on the back-end as opposed to preventing a problem at the beginning. We encourage you to have the IRS undertake preventive action in this area immediately. To just refer to documents, as the IRS did in the New York Times article, is not enough.
Finally, while we believe the IRS and Treasury have broad authority to undertake the proposals we have outlined, please inform us promptly if you believe additional authority is needed. The Finance Committee is expected to mark up the "Good Government" legislation next week and that would be an appropriate vehicle to consider any additional authorities required.
Thank you for your time and consideration to this important matter.
Cordially yours,
Senator Charles Grassley
Ranking Member
Senator Gordon Smith
Senator Pat Roberts
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