New Fraud Targets Tax Professionals

New Fraud Targets Tax Professionals; segment by the outstanding folks at Nightly Business Report:

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For more on tax fraud / scams, check out the 2018 IRS Dirty Dozen.

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Used TaxAct for My Taxes This Year

TaxAct

The American tax code stinks, and everyone knows it, yet politics and money prevent reform.


So we are forced to waste a lot of time wrestling with filing every year, and I hate it.  I really do.

The prohibitive cost of using a certain popular online tax preparation service prompted me to try something new this year.  I tried TaxAct (www.TaxAct.com +TaxAct ) and I am very pleased to report that I can recommend it.

The site made everything easy for me, though I will confess that my tax situation is relatively simple this time around.  I was able to process both my federal and state returns for free, and I was able to e-file my federal with the IRS for free to boot.  Very cool.

For those who have to mess with all kinds of deductions, credits, allowances, etc. the pricing for premium preparation packages is not that bad with TaxAct.  Much cheaper than many competitors.

If you use TaxAct online, the pricing looks like this:

TaxAct Online

If you choose to download the TaxAct software instead, it will cost you more:

TaxAct Download

My lady has an old friend who's an accountant and he does her taxes for free; nice to have friends like that.

For those of you struggling with a stressful tax situation, and you're doing your taxes by yourself: my heart aches for you!

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A Strategic Default on Your Mortgage May Cost You More Than You Think

I was listening to some business news the other day. According to the well respected economist who was being interviewed, folks who have been walking away from their home loans in response to owing more on their home than their home is worth, have been helping to fuel consumer spending. The money that was being used to pay the mortgage has been freed up to be spent on other things. Great news for this fledgling economic recovery, but going the strategic default route should never be taken lightly. Not only will your credit score being ruined for years, you may end up with a massive tax bill from the Internal Revenue Service (IRS).

Here's a clip from a great WSJ personal finance article:

"...Americans considering walking away from an unaffordable mortgage: Beware of taxes.

Though not every homeowner who's underwater on a mortgage need worry, many are finding that a foreclosure or other form of housing loss can lead to a big tax obligation.

Maxine McDaniel walked away from her Loveland, Colo., home in January. Now the 59-year-old nurse faces a potentially huge tax bill.

In Ms. McDaniel's case, the 59-year-old in January abandoned the 4,300-square-foot Loveland, Colo., home she and her late husband built. After her husband's death in July 2008, Ms. McDaniel, who earns about $34,000 a year as a home-health nurse, couldn't maintain the $3,000 monthly payments necessary on her nearly $500,000 interest-only mortgage. So she stopped making them and moved in with an uncle.

Now, she's bracing for the next blow: an Internal Revenue Service form detailing as much as $150,000 in debt canceled by the bank when it took control of the house. The canceled debt is a form of income, says the IRS—meaning she'll owe taxes on it.

'I had no clue this would happen,' says Ms. McDaniel, who, with her husband, had refinanced at least three times, including one cash-out loan. That transaction caused her problems because, while canceled debt originally used to buy or build a house can be exempted from tax filings, debt used for other purposes cannot. 'I just thought I'd get out from under the house and that would be that,' she says.

As the U.S. economy continues struggling with the fallout of the debt-induced housing crisis, millions of homeowners like Ms. McDaniel are discovering that their decision to walk away from a mortgage could result in tax bills running into the thousands or tens of thousands of dollars.

The upshot: anyone weighing whether or not to seek a mortgage modification—or debating whether to abandon a house that is worth less than the mortgage—should consider the tax treatment carefully before making a move. The same holds for any form of consumer debt that a bank ultimately cancels, including credit-card balances or an auto lease.

Federal and state tax laws have long viewed canceled debt as income because consumers who borrow money to buy a house—or who pull money out of their house to buy cars and such—and then don't pay it back 'wind up ahead of where they were,' says an IRS spokesman.

Thus far this year, Michele Knight, a CPA with a high-end clientele in Keystone, Colo., has had five clients owe taxes tied to houses and another five tied to credit cards and auto leases. 'They're calling me in tears and saying, 'What do you mean I owe taxes?'" she says. 'I never would have expected it.'

Dianne Corsbie, a White Plains, N.Y., financial planner, says about 5% of her 200-client practice owes taxes because of a foreclosure, most tied to investment properties. In Napa, Calif., Duane Carey, owner of a Ranch Tax Service, says every fifth person he sees 'comes in angry, holding one of these 1099s.'

Overall, the IRS estimates that individual taxpayers will have filed nearly 3.6 million tax returns for 2009 that include income from canceled debt. That's down a bit from 2008, but up 17% from 2007. The numbers include taxes due on primary homes, vacation and rental property, credit cards, auto leases and other canceled debts. The IRS projects the numbers to rise in coming years.

Part of that rise will likely come as the government expands its mortgage-modification program, including a call in March by the Obama administration for banks to reduce principal as a way to help people remain in their homes. That reduction could lead to tax obligations.

At first the government's mortgage-modification program focused on primary mortgages, which are tied to the purchase or construction of a primary residence, and which are eligible for exemption under a 2007 Congressional act aimed at helping homeowners avoid the tax implications of a foreclosure.

That act—the 2007 Mortgage Forgiveness Debt Relief Act—exempts taxpayers from as much as $2 million in forgiven debt. But the debt had to be acquired before Jan. 1, 2009—and had to have been used solely to buy, build or remodel/repair a primary residence.

The government's new, expanded modification programs include short sales, in which a bank agrees to accept as full payment less than the value of the mortgage balance; deed-in-lieu transactions, when a homeowner gives the house to the bank instead of repaying the mortgage; and second mortgages such as home-equity lines of credit.

In many of those instances, say Treasury officials, homeowners used mortgage money to fund everything from tuition and medical bills to vacations and cars and even the down payment on a second home or investment property. That debt, however, isn't eligible for exemption.

Sometimes the tax bills are so high that people can't afford to pay. In such a situation, the IRS will allow taxpayers to apply for an installment-payment plan.

Some homeowners can avoid the taxes completely if they can prove insolvency, in which the total value of debt exceeds total assets. But even that could leave some owing taxes.

IRS rules stipulate that a taxpayer can escape taxes up to the extent of insolvency, meaning that if one's liabilities are $500,000 and assets are $300,000, the $200,000 difference is the extent of the insolvency. But if the person has $250,000 in debt canceled, then $50,000 is taxable income.

'People think their house was underwater, so they're insolvent and can get out of owing taxes,' says Arthur Auerbach, a member of the Individual Income Tax Technical Resource Panel at the American Institute of Certified Public Accountants. 'But it doesn't work that way...'"

If you visit WSJ online to read the full story, be sure to read the comments. Lots of insight there, as usual. Enjoy!

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Short Sale, Long Consequences

Short Sale

It is August 2008 and I have been divorced for two years now. What a two years it has been. Left with nearly $15,000 in credit card debt by my reckless and deceitful ex-husband, and just out of graduate school working part-time jobs to get by, it seemed like I would never catch up. Oh, and there is the deadly “foreclosure proceedings begun” on my credit report, which I’m told will be there for the next seven years. Nonetheless, it is August 2008; I am divorced, happy, and free, with a new love in my life, and more than two thirds of the debt paid off. I am able to go off the debt management program that has helped me reach this goal. I plan, and take, my first vacation in more than five years.

What do I come home to? A notice and bill from the IRS that they are increasing my 2006 reported income by more than $5,000, meaning I owe them about $800, because my ex and I sold our foreclosed house in a short sale more than two years ago.

Just when I think life is getting better, something surfaces, something bites my (thankfully, tanned) backside.

Of course, my first reaction is that this is an injustice. For one, the mortgage company (since gone bankrupt itself) never told me that I would be liable for claiming the waived debt as income, and never furnished me with a 1099 form. (In a recent phone call, their rep claimed they sent it to my ex, logical as he was the primary borrower.) For another, there is the sting of personal injustice: my ex had let the home fall into foreclosure behind my back. I still don’t know what happened to all the money that was supposedly going towards mortgage payments, thousands and thousands of dollars. (Of course, I do have my suspicions, most of which involve my ex’s internet affairs, substance abuse, and sending money to his con-artist brother in Europe for weird and always unsuccessful business ventures.)

The irony is, it was me who decided to file taxes separately for 2006, although we were technically still married for half of it, because I didn’t want to be associated with him any longer, even in the eyes of the IRS. If we’d filed jointly, he’d now be liable for half the short sale income. In fact, I might even be eligible for an IRS protection called “Innocent Spouse,” that waives the liability of a spouse when debt or income has been concealed. (He never shared the 1099.) As it is, however, two tax professionals and the IRS help desk in Providence, RI have convinced me that I am liable for the amount and will be held responsible, especially since my ex doesn’t seem to have filed income taxes at all for that year. As both of the accountants told me, “The IRS goes after the person with the deeper pockets.” It seems unimaginable but that person is me!

Ademola, another member of the www.FedPrimeRate.com Money Blog, wrote an entry about this recently. Bush and Co. have issued a special moratorium that currently prohibits taxing short sale amounts. It’s a good idea; with so many people facing foreclosure and crisis, this waiver is a welcome relief, I’m sure. After all, in my case the short sale amount, and subsequent tax, wasn’t thousands and thousands of dollars. In today’s market, however, large short sale amounts are a distinct possibility for those trying to sell their homes, especially if there’s a need to sell quickly. Read more about the moratorium here.

My story, though, is still a teaching story, I think. When you’re in financial and personal crisis, as I was when I negotiated the short sale, it’s easy to jump at the first relief without considering the long-term consequences. Don’t get me wrong, the short sale was probably still my best option, but I would have handled the taxes differently. I wish I had slowed down and asked myself questions, not yes/no questions, but open questions like: What do I need to know about a short sale?

That’s the thing about crisis: It seems like the time to act fast. Maybe, that’s really the time to slow down and do research. To ask an expert. To ask yourself: how will this affect me two years from now, when I come home from vacation, tanned, happy, and newly in love? How will this affect me when I’m almost-financially-secure again? How might this affect me in eight years or eighteen? In the moment when it’s hardest to think about long-term, we sometimes most need to.

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Don't Forget: There Is A 3 Year Moratorium On Tax Liability For Debt Forgiveness

On December 27, 2007, President Bush signed the Mortgage Forgiveness Debt Relief Act of 2007 (HR 3648) into law.

This law established a 3 year moratorium that prevents any debt forgiven by a lender from being counted as income by the Internal Revenue Service (IRS). Basically, if a homeowner negotiates a short sale or any other type of debt forgiveness with a lender, the homeowner will not be liable for any taxes on the forgiven debt.

For example, if a homeowner in foreclosure gets a bank to agree to take $400,000 for an original loan amount of $500,000, then the homeowner will not have to pay any taxes on the forgiven $100,000 ($500,000 minus the $400,000).

The Mortgage Debt Relief act also extends the private mortgage insurance deductions through 2010. The deduction for private mortgage insurance allows families with an adjusted gross income of $109,000 or less to deduct all or some of their premium payments.

As it stands, the Mortgage Forgiveness Debt Relief Act only applies to a primary residence. So second homes and investment properties are out. Still, even with a second home or an investment property you may not have to pay any tax on the forgiven debt, so long as you can prove to the IRS that you were insolvent at the time. Which may or may not be tough to do.

With the Mortgage Forgiveness Debt Relief Act of 2007, as long as it’s your primary residence, you don’t have to prove anything to the IRS.

If a short sale is the best option, then this is the time to negotiate one.

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