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Bill and Betty Bankrupt have received a notice of seizure on their home. Title to the home is jointly held, and they have owned it for five years. They give you the following information regarding the home:

Fair market value

$165,000

Mortgage

$125,000

Equity

$40,000

Bill and Betty want to know what will happen to the mortgage if the house is sold and they want to know whether the IRS will pay off the first mortgage for them. They also want to know whether the IRS can levy on their joint equity in the house or only on Bills equity.

In answering this question, assume that the tax being collected by the seizure is as follows:

(A) The assessment is $45,000, representing the balance due on their joint 200X5 and 20X6 federal income tax returns.

(B) The assessment is $45,000 and represents the balance due on Bills separate returns for 20X7 and 20X8. Bill had filed using the married filing separate status because the marriage was on the rocks at the time. The time to elect to file a joint return has not yet expired, and filing jointly would save them approximately $3,000.

(C) The assessment is $45,000 resulting from an audit of their 20X7 and 20X8 income tax return. The auditor found that Betty had not reported approximately $40,000 of gross receipts each year resulting from her real estate business. Bill did not know how successful Bettys real estate business was, and he never saw any of the money because Betty was always reinvesting it in new properties. The assessment was made jointly against Bill and Betty.

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