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Tax identity theft victims catch a break

Thanks to the efforts of U.S. Senator Kelly Ayotte, R-N.H., a victim of tax identity theft will be able to obtain a redacted copy of the false tax return filed under the victim’s Social Security number.

bizO-Hamil_James_BizO-640x255The issue that Ayotte raised with the IRS is that the victim is informed that a fraudulent return has been filed using their Social Security number, but the victim has not previously been able to determine what financial information the criminal filing the return may have been able to obtain.

To obtain a copy of a fraudulent return, the party making the request must be listed as the primary or secondary taxpayer on the fraudulently filed return. This means that a dependent of the victim will not be able to request a copy of the return and a parent will not be able to request a copy of a child’s fraudulently filed return.

The instructions to obtain a copy of the return are very specific and IRS warns that failure to follow the instructions may result in a return of the request.

The victim should send a signed letter that includes the name, Social Security number, mailing address and the tax year(s) for which a fraudulent return is requested. The request must include the specific statement “I declare that I am the taxpayer,” with the signature below that declaration.

The request must also include a copy of the victim’s government-issued identification, which could be a driver’s license or a passport.

If the victim has moved and not yet informed the IRS of the new address, the request for the fraudulent return may be rejected. Use IRS Form 8822 to inform IRS of your new address.

The request must be sent to: IRS, P.O. Box 9039, Andover, MA 01810-0939. IRS says it will acknowledge the request within 30 days of receipt and will either send the fraudulent return or a follow-up correspondence within 90 days of the victim’s request.

Q: We purchased our home in 2003. We borrowed $220,000 to help buy the house. In 2006, my mother died and I inherited enough money to pay off the mortgage. Our two kids are now within one and three years of starting college, and I wish I had kept the inheritance to pay for college. I have learned that I can borrow against the house on a 15-year loan at favorable interest rates and it seems easiest to just take one big loan now, for $150,000, and hold the money for future college needs. Will I be able to deduct all the interest on this loan because it is less than our original purchase loan?

Interest on a loan used to acquire a principal residence is deductible. When that loan is refinanced, the new loan continues to qualify as acquisition debt up to the principal amount of the old loan.

Your problem is the principal of the old loan was zero at the time of the new financing. So your new $150,000 loan does not qualify at all for the acquisition loan category.

Debt that is not qualified acquisition debt is eligible to be deducted as home equity debt. This category is limited to the interest on $100,000 of principal. This category would allow you to deduct most, but not all, of the interest for years that the principal exceeds $100,000.

The home equity category is not deductible for alternative minimum tax (AMT) purposes when the loan proceeds are not used to make improvements to the house. You should check prior tax returns to get an idea if you are subject to AMT.

If you borrow now and invest the proceeds, the interest on principal above $100,000 will be classified as investment interest and may be deducted up to your net investment income for the year.

If your income is not too high, there is a deduction allowed for loan proceeds used for qualified higher education expenses. But the expenses must be incurred within a reasonable time after the loan is taken, which is generally within 90 days.

If you wait to take the loan, you might be able to qualify some of the interest on principal above $100,000 as education interest.

James R. Hamill is the director of Tax Practice at Reynolds, Hix & Co. in Albuquerque. He can be reached at