FOR IMMEDIATE RELEASE
December 18, 2007

CONSUMER ALERT: BIG TAX BILLS FOR FORGIVEN DEBT MAY BE IN YOUR FUTURE

Contacts:

Baltimore CASH Campaign
Joanna Smith-Ramani
443-451-4079

Maryland Consumer Rights Coalition
Stephen D. Hannan:
410-528-1591

Maryland CASH Campaign
Robin McKinney
410-971-3918

Baltimore, MD: For thousands of Maryland homeowners, losing their home to foreclosure is devastating financially and emotionally. This year, in Baltimore alone, 75 homes a week are lost through foreclosure. “Because of the current tax laws, first you get to go through the trauma of losing your home, and then you may have to pay for any break the loan company may give you,” says Joanna Smith-Ramani, Director of the Baltimore CASH Campaign.

For many homeowners, a foreclosure is just the beginning of their financial troubles. If the homeowner has part of the debt forgiven during the foreclosure process, they are required to include the forgiven amount as income on their tax return. This amount is called a “windfall” and often taxes will be owed on that amount. Forgiven debt in a foreclosure can range from a few thousand dollars to hundreds of thousands of dollars, so the amount of taxes owed can be significant. This scenario, known as the “1099 shortfall” is due to a Federal policy that treats forgiven debt of all types as income.

This “windfall” can occur in the following scenarios:
• The increase “income” bumps them into a new tax bracket and they lose out on critical tax credits and exemptions.
• They owe taxes on the forgiven debt and are entirely unable and unprepared to pay for it because they never saw the forgiven amount as cash and did not put aside funds for the taxes.
• Homeowners are forced to sell their homes for less than the value of the mortgage to avoid a foreclosure. If the lender forgives that difference, they are liable for income taxes on the difference.

Foreclosure is just one way already stressed homeowners can fall victim to the forgiven debt scenario. This also may occur with when a consumer makes a deal to pay off a credit card balance or student loan.

Homeowners and consumers also need to review the 1099-C they receive from the lender to make sure the forgiven amount is correct. If it is incorrect, the taxpayer must contact their lender immediately and request a corrected one.

There are few free resources available to help negotiate with the IRS. Homeowners need to be pro-active and contact their mortgage holder early to start talking about restructuring their loan if they cannot pay it. Just not paying is not a good option. Homeowners having problems paying their mortgage can receive free, immediate counseling by calling 888-995-HOPE.

Taxpayers making less than $40,000 may qualify for free tax preparation and free legal representation. They should contact 1-800-492-0618 for a listing of free tax preparation sites. For existing tax disputes, contact Maryland Volunteer Lawyers Service at (800) 510-0050 More information on foreclosure and taxes can be found at:

www.baltimorecashcampaign.org;
www.mdcash.org;
www.mvlslaw.org, and
www.mdconsumers.org

Anyone having difficulty resolving an IRS bill, letter or notice through normal IRS channels should contact the Taxpayer Advocate Service intake line at 1-877-777-4778, TTY/TDD 1-800-829-4059.

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Maryland CASH Campaign (410-971-3918) is a coalition of organizations that serve low- and moderate-income taxpayers throughout the state. Collectively, these sites expect to serve 17,000 low-income Marylanders through free tax preparation this tax season, saving them over $1.2 million in tax prep fees and helping them claim over $17 million in federal refunds.

Baltimore CASH Campaign (443-451-4079) is a coalition of organizations that works to promote financial stability and strong financial futures for working families in Baltimore. Last year, the coalition provided over 7,200 low-income taxpayers with free tax preparation assistance, helping them claim over $13 million in refunds.
Maryland Consumer Rights Coalition (410-528-1591) is a non-profit organization that seeks to advance and protect the interests of Maryland consumers through education and advocacy, and works to ensure fairness and safety in the marketplace.