Questions for the Tax Lady: August 3rd, 2009

Good morning everyone! Since today is Monday I have looked through questions being asked on Twitter and Avvo and selected a few to answer. As I have mentioned before, I am making a weekly effort to answer tax related questions that I come across. I am also encouraging people to ask me questions through one of the links below. You can send me an email, direct message or @ reply, and I will do my best to get an answer for you!

Question #1: Is there a statute of limitations on Federal income taxes owed?

Yes, generally the IRS statute of limitations is 10 years, unless they renew it. Check out article on statutes of limitations from my website.

The Statute of Limitations on Collections is the amount of time that the Internal Revenue Service (IRS) has to collect a tax liability from a taxpayer. The date that taxes expire is referred to as the “Collection Statute Expiration Date” (CSED). According to the Internal Revenue Code, Section 6502, the IRS generally must collect the tax owed “within 10 years after the assessment of the tax.” Depending on the taxpayer, the assessment of tax may be the date a taxpayer files a tax return with a balance owing or the date that the IRS files a tax return on behalf of a non-filer taxpayer. Thus, the statute of limitations will begin once the tax has been “assessed” by the IRS.

Although the IRS generally has just 10 years to collect on an outstanding tax liability, there are certain events or transactions that may extend or suspend the statute from expiring. A variety of laws affect the CSED. For example, if a taxpayer files bankruptcy” or files an Offer in Compromise, the statute of limitations is generally suspended during the time the bankruptcy or Offer in Compromise is under review. Also, additional assessments of tax owing may extend the amount of time that the IRS is allowed to collect. Therefore, if the IRS is going to collect taxes owed, they must do so within the time frame permitted by law.

Question #2: I have a home in foreclosure. I bought it for $172,000 and owe $302,000 how much taxes will I get hit with?

Although the total canceled debt will total around $130,000 you will not need to claim it as income on your tax return. Although canceled credit card debt IS taxable income, this is not the case with mortgage related debt. Your lender may send you a 1099 form next January, but if they do then just file an IRS Form 982.

Question #3: Is there such a thing as a consolidated tax return? Or, at least a return that allows you to combine multiple states?

Although there is something called a “consolidated tax return” it is actually something used for corporate taxes. For your personal income taxes you are going to need to file a return with each state you earned income in. Unfortunately, since every state has their own revenue departments you are going to have to file a specific form for each. However, if you hire a professional tax preparer, then they should easily be able to get you compliant with all states rather easily.