The Internal Revenue Service is finally reaching out to former homeowners who have suffered foreclosure and now are being hit with taxes on any money they were forgiven on their mortgages.

The effort comes after Senate Finance Committee members urged the IRS to do more to help families who have lost their homes in a foreclosure and are now facing unexpected tax bills (see Grassley, Colleagues Urge IRS Help on Loan Forgiveness). In response, the IRS has opened a new section of its Web site that offers information about special relief provisions that could reduce the tax bite for people who have lost their homes.

The site now includes a worksheet that is supposed to help borrowers find out if any of the relief provisions apply to them. Taxpayers who discover they do owe the additional tax can also find a form online that will let them request a payment agreement with the IRS. The IRS noted that in some cases eligible taxpayers may qualify to settle a tax debt for less than the full amount due using an offer-in-compromise.

However, the IRS is still taking a hard line on taxing certain people who may have lost their homes. The agency noted that relief could be limited or even unavailable in some situations, for example, when part of a home was rented out or used for business purposes.

The IRS also advised borrowers who received a Form 1099-C from a lender that has reduced or eliminated their debt to examine the form carefully. The document is supposed to show the amount of debt forgiven and the fair market value of the property given up through foreclosure. But the IRS noted that while the winning bid is normally a property's fair market value, it might not reflect the home's true value. Lenders are required to send a copy of the 1099-C to the IRS and if the amount conflicts with what the taxpayer has reported, the IRS may then send a notice to the borrower.

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