IRS Letter:" You paid martgage interest more than $10,000

[snowbirdgv]

What is the name of your state (only U.S. law)? Arizona

I do not think I have to file tax return...I am disabled( since 1994), on SS with income of $1065 per month. I have not filed since 1994.

I got a letter from IRS asking me for Form 1040 for tax perios ending Dec, 2007. Letter states I paid mortgage interest of more than $10,000.

On paper,I own three properties. I tried to sell the big house for a couple of years. This house (the most expensive) was finally sold on an installment loan contract (loan stays in my name because they could not qualify for a loan)
I had to borrow money from friend, take out loans just to keep this house from forclosure. I make no money on this house, just the payments are made for the mortgage.

The second property- condo- is currently in pre-forclosure. The payments are only $320 per month, but I am sinking in debt and can't afford it anymore.I may just let it go if it doesn't sell soon. I owe more than the value.

The house I live in is one that I owe more on it than the value. It has been for sale for over a year and I can't keep borrowing money to keep them. My friend from Canada has loaned me money to keep up with everything.

A few years ago (before the market crashed) I took out a large equity loan on the house I live in - it was for $50,000. I have used that money to live on and to keep up payments. My friend co-signed with me for that loan. We agreed to let him a have a lein on my properties for that loan, so he gets any money from the sale of the properties, if and when they sell.

So, between these loans, borrowing from friends, market crash, I am in debt.
I did not think loans from bank or friends is considered income?

Even when my daughter rented one property, she did not pay enough for the payment, and I had to make up the difference...would this still be considered income if I did not make a profit?

This letter says I have 45 days to give them information or I can be charged with fines and penalties, and they may (under section 6020b) prepare a return based on their income information.
Should I call them, or answer their letter, or find a tax person to assist?
I don't want to say anything wrong ...
Thank you in advance for your input.

[FlyingRon]

The loans aren't considered income unless the lenders forgive your obligation.

It's confusing what you are saying. Did you claim more than $10,000 in interest? Did you actually, personally pay more than $10,000 that you were obligated to? Did some of the money that you paid come from other people?

[Zigner]

Based on reading other threads, yes, the rent you received (ie: someone paid the mortgage as their payment for living in the house) does need to be reported as income. However, your expenses will be in excess of that income. So, you won't be taxed, but it does need to be reported.

[tranquility]

Go to a tax professional. You have a little bit of a complex situation and you need someone to go through everything. I suspect you won't owe taxes, but, without actual numbers, it is impossible to know. Cancellation of debt, allocation of the installment sale and the rental can affect the return and you need to properly report them as the IRS return will not reflect your expenses.

I do know one problem people have in understanding property sales involves refinancing or equity loans. Money out can be thought of as the benefits of a partial sale. I can't tell you the number of times a client sells some property and we calculate the capital gains they have to pay. "How can that be? I didn't get any money after the realtor and the loan was paid." That can be because the client already got and spent the money.

Have someone look at it. Getting a proper accounting will help you deal with the IRS appropriately.

[snowbirdgv]

Originally Posted by FlyingRon

The loans aren't considered income unless the lenders forgive your obligation.

It's confusing what you are saying. Did you claim more than $10,000 in interest? Did you actually, personally pay more than $10,000 that you were obligated to? Did some of the money that you paid come from other people?

Thank you for responding.
No, I did not "claim" anything. I did not file since becoming disabled in 1994.

It appears that the mortgage companies sent to the IRS the interest information that was paid on the loans.
My SS income is much less in dollars than the interest paid.

So, in my primary residence,the loan payments were made, but some of it was made by an equity loan that me and my then partner took out together. I still live in this house.

The other house that I have now sold ( still in my name until they can get their own loan) had payments made on it by using loan money too. The payments on that house are around $1500 per month. I kept getting more equity loans and personal loans just to keep it.
My daughter tried to buy it, she lived in it for awhile, but it is too expensive for her too. We were happy to sell it for the balance owed.


I think the IRS is wondering how I paid out so much with so little income coming in.
Would it be a good idea to just let them do tax return for me? I feel scared to call them after stories I hear.
I assume it is going to be expensive to hire someone ,and it may be better to let them figure it all out after I tell them that the funds came from loans?

One more question: if I had a partner living with me and he paid me living expenses to help toward food, utilities, etc, is that income?

Thanks again for the good advise you give here,

[tranquility]

While FlyingRon often gives good advice, he does not do this for a living. I do.

Your post indicates things which need to be dealt with. Go to a tax pro. You may get out of this with no tax owed. But, I promise, if you don't, the IRS will assess more than any tax professional will charge.

[snowbirdgv]

Originally Posted by tranquility

While FlyingRon often gives good advice, he does not do this for a living. I do.

Your post indicates things which need to be dealt with. Go to a tax pro. You may get out of this with no tax owed. But, I promise, if you don't, the IRS will assess more than any tax professional will charge.

Thank you for the input.

In trying to determine who to hire to help me with this tax issue, would you recommend a tax attorney, tax advocate, accountant, calling one of those ads that I see on tv for IRS help, H&R block.....?
I live near Tucson, Arizona

Also, if the IRS goes ahead and prepares a return for me (they indicate that they can) will I still be able to do a return on my own later?
And,the IRS has asked for my phone number on the form. Should I give it to them, and talk to them- or is it better to let my tax helper handle them?
Thanks again.

[quincy]

Snowbird, I don't have an answer to your question - so wait for the experts to post back - but I did want to mention that, although the IRS DOES send out letters that need to be responded to, the IRS does NOT send out emails.

DO NOT open any EMAIL that purports to be from the IRS.

There is a computer virus that is attached to these emails.

[tranquility]

I'd go to a CPA or an EA. While the chains can be good, you do have a couple of complexities which may make your return more difficult. But, there is no need for a tax attorney from what I see.

[LdiJ]

Originally Posted by tranquility

I'd go to a CPA or an EA. While the chains can be good, you do have a couple of complexities which may make your return more difficult. But, there is no need for a tax attorney from what I see.

I agree that a tax attorney is not needed, and I am not sure that paying a CPA's rates (depending on the CPA) would be necessary either.

You absolutely needed to be filing tax returns to deal with fairly complex tax issues, but I also agree that it's unlikely that you would have owed any tax.

What you need is an experienced tax professional to handle all of this for you. Most likely that means that you need an EA, but even an experienced professional who is not an EA can probably help you.

The good news is that this is the off season and many professionals will help with IRS problems at a discounted rate.

[FlyingRon]

I didn't give any advice, I just asked you to provide more information. You need to have filed when you did not.

My advice: Listen to Ldij.

[tranquility]

The CPA/EA debate will always be on the forum. CPAs do tend to charge more--and get it. (Even for non-business clients.) Why that is and if that is what you need is a part of the good natured banter of the forum. I've changed from saying CPA to tax professional in my writing and here I even went so far as to say EA or CPA and still get shot down, sigh.

As to the questions you were asked, I disagree the answers are going to significantly change my response. See the guy, get your reporting right and learn about the complexities of your economic situation. I'm not sure how much of a deal you will get before Oct. 15, but it is certainly not tax season and you should be able to get in most anywhere.

[davew128]

It also depends on the professional. This is one EA who charges CPA rates. But having been involved with EA groups over the years, it is my observation that many EAs do just 1040's and are not capable of much else just as many CPAs cannot do 1040's. As with all professions, YMMV.

[LdiJ]

I just got back from the IRS seminars in Atlanta, so I haven't been around all week..gotta get that continuing education.

One of the reasons why I say the things that I do, is because our firm specializes in helping people deal with IRS problems in the off season...and we heavily discount our rates. True, is someone came to us now with the kind of problem that the OP has, we would put them off until after October 15th. We would call the IRS and get them to extend time to respond, and then deal with it after the 15th. We are also not unusual. Heck, I talked to all kinds of people this past week whose firms are very similar to ours.

Our firm has tax attorneys, CPAs, EAs and seasoned professionals who are none of the above. However, one of the reasons why I make cautionary comments about paying high rates because someone has "designation" after their name, is because in our firm, there is ONE person that EVERYONE goes to with questions...the tax attorneys, the CPAs, the EAs etc...and that ONE person, is "none of the above". It doesn't matter if its corporate or individual, she knows the answer and is rarely wrong.

There are all kinds of people out there like her. I did three focus groups this time around and MET quite a few of them.