Two years ago, William Stout lost his home in Allentown, Pa., to foreclosure when he could no longer make the payments on his $106,000 mortgage. Wells Fargo offered the two-bedroom house for sale on the courthouse steps. No bidders came forward. So Wells Fargo bought it for $1, county records show.It's a perfect Catch-22: You lose everything, but at least your debt is forgiven, but because the debt is forgiven, it's income, and now you have a new debt to Uncle Sam, one with penalties and interest added, because of the time that elapsed since you "earned" that income. And then you have just a month to appeal, or you lose your rights to question the decision. That 1-month appeal period is the icing on the cake. Most low income people don't have attorneys waiting in the wings to give them good advice in a case like this, which can often be won on appeal (after spending a lot on legal bills, of course). Many just go into panic mode and freeze instead, doing nothing until it's too late.
Despite the setback, Mr. Stout was relieved that his debt was wiped clean and he could make a new start. He married and moved in with his wife, Denise.
But on July 9, they received a bill from the Internal Revenue Service for $34,603 in back taxes. The letter explained that the debt canceled by Wells Fargo upon foreclosure was subject to income taxes, as well as penalties and late fees. The couple had a month to challenge the charges.
It all makes perfect sense in Bush World, though. What else is the I.R.S. to do? The rich are off limits. Middle class people fight back. So why not go after the poor and disadvantaged? I.R.S has to collect taxes somewhere.