Senate Finance Committee Ranking Member Charles Grassley and Republican colleagues Gordon Smith and Pat Roberts send a letter to the IRS requesting relief from DOI income for taxpayers whose homes are foreclosed:

We are writing to you regarding the President’s recent proposal [blogged here] to provide that cancelled mortgage debt on a primary residence is not counted as income. … As these families struggle to reduce their home loan debt they are hit by taxes that are due to debt forgiveness from the lender. The President is right to seek relief for these working families. While the Congress considers the President’s proposal, Americans shouldn’t have to wait to get the relief that is needed right now.

We strongly urge the Treasury Department to take immediate steps to encourage working families that face the difficulties that the President outlined in his speech on August 31, 2007, to submit (and have the IRS accept) offers in compromise that will either eliminate or reduce the taxes that they owe due to cancelled mortgage debt on a primary residence.

Congress has granted IRS broad authority to compromise a tax liability under Section 7122. Perhaps most relevant here is that the Treasury Department has interpreted that authority such that “IRS may compromise to promote effective tax administration where compelling public policy or equity considerations identified by the taxpayer provide a sufficient basis for compromising the liability.” Treas. Regs. 301.7122-1(b)(3)(ii). President Bush on August 31, 2007, made the case himself for a compelling public policy rationale, stating: “When your home is losing value and your family is under financial stress, the last thing you need to do is to be hit with higher taxes.”

We recognize that it would be simpler to change the law to provide relief; however, the top goal we all share is providing relief for working families in financial stress as quickly as possible. If the IRS issues simple procedures for taxpayers to file an offer in compromise — and undertakes a significant program of outreach to taxpayers, practitioners and lenders – much good can be accomplished immediately.