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We are an independent, advertising-supported comparison service. Our goal is to help you make smarter financial decisions by providing you with interactive tools and financial calculators, publishing original and objective content, by enabling you to conduct research and compare information for free - so that you can make financial decisions with confidence.
Bankrate has partnerships with issuers including, but not limited to, American Express, Bank of America, Capital One, Chase, Citi and Discover.
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The offers that appear on this site are from companies that compensate us. This compensation may impact how and where products appear on this site, including, for example, the order in which they may appear within the listing categories. But this compensation does not influence the information we publish, or the reviews that you see on this site. We do not include the universe of companies or financial offers that may be available to you.
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Dear Tax Talk,
I short sold my house in 2006. I got hit with big tax bill, which I find outrageous because if I could not afford the house, why does the government think I can afford the tax? My question is: How can I get out of the forgiven debt tax? Can I claim insolvency this late after the fact? — Robert
Dear Robert,
Of course, it would have been better if you had claimed the insolvency exception when this first came up. If you short sold in 2006, you were at the forefront of short sales since it is a rather new concept. In any event, if your debt was forgiven, the IRS is charging that as income to you. Normally, the statute of limitations on assessment of IRS taxes is three years from the date you filed. This would mean 2006 is closed by statute for amending or adjusting your tax.
However, tax mistakes are not set in stone even though closed by statute. The best way to get your case back in front of an IRS agent is to file an Offer in Compromise, stating that you have doubt as to liability for the tax. The IRS agent may consider removing a tax assessment if you can show you were able to avoid the assessment by establishing insolvency. Use IRS Form 656 to apply for an Offer in Compromise.
Ask the adviser
To ask a question on Tax Talk, go to the “Ask the Experts” page and select “Taxes” as the topic. Read more Tax Talk columns.
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.
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