We paid the minimum monthly payment required, which didn’t cover all the interest owed, so that amount was added to our mortgage balance. Like others, we have experienced the nightmare of the current housing market, and with the negative amortization adding on even more debt, we are severely underwater.

We’ve worked with two companies trying to get a workable loan modification but to no avail. The bank is not cooperating at all.

A lawyer I consulted is advising us not to pay at all going forward, saying that the upside-down home isn’t worth saving or worth the grief. She told us to put our payment amounts into savings so that we have something to live on after we have to leave the home, which I so far have been able to do. But I’m worried about the potential fallout.

Would we be required to pay taxes on the remaining balance we owe after a foreclosure? If we can’t afford to pay the taxes on $200,000 of untaxed income (that we really didn’t earn), what do we do then? Does bankruptcy help with that?

Answer: When a lender cancels or “forgives” debt, it typically sends you a Form 1099 for the amount of forgiven debt. This amount usually must be included as income on your tax return. But there’s a big exception when it comes to mortgage debt secured by your primary residence.

The Mortgage Forgiveness Debt Relief Act of 2007 generally allows you to exclude from your income the debt that’s left over after a foreclosure. The law applies for the calendar years 2007 through 2012.

You can find more information about the act in IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments, as well as in IRS news release IR-2008-17.

In some cases, lenders aren’t content to write off the excess debt and instead decide to pursue homeowners after foreclosure for the remaining balance owed. You may be protected by state law from such a lawsuit (as homeowners in California typically are), but you’ll want to discuss this possibility with your attorney. If you are hit with such a lawsuit, you may need to consider filing for bankruptcy.

Answer: It sounds as if you were getting your sister qualified for Medicaid, the government program that covers health and custodial care for the indigent. Medicaid now has a five-year “look back” period that penalizes transfers of money or assets when people apply for coverage. The look-back period is designed to discourage people from artificially impoverishing themselves by transferring assets to others so that they can qualify for Medicaid to cover nursing home bills.

You’re right that destroying financial documents after three years may be a bit precipitous. The IRS typically has three years from the due date of the return, or the date it was filed, whichever is later, to conduct most audits. But the deadline can be extended an additional three years if the IRS believes you significantly underreported income. And certain documents need to be retained longer. That’s why many tax experts recommend hanging on to supporting documents for your tax return for at least seven years, and keeping the tax returns themselves indefinitely. You also might consider scanning important financial documentation into your computer and keeping back-ups offsite.

The good news is that many of the statements you’re likely to need can be reordered from the financial institution that originally issued them. There may be fees involved, but many banks, brokerages and credit card firms easily can provide you with statements dating back six years, if not longer.

Answer: You’ve learned a couple lessons, foremost among them that you need a new tax pro. Filing your return without letting you see it was a definite no-no.

Another lesson is that your private financial data probably shouldn’t be entrusted to the U.S. mail system. It’s more secure to drop your documents off with your tax preparer and pick them up yourself, along with a copy of your return, when he or she is done. The original return can be electronically filed using the IRS’ secure, encrypted system, eliminating the need to use the mail.

You can put 90-day fraud alerts on your credit reports at the three major bureaus (Experian, Equifax and TransUnion). Fraud alerts notify lenders that they should take extra steps to verify identity before opening accounts in your name. For more protection, you may want to consider a credit freeze, which doesn’t rely on lenders’ sometimes-wavering vigilance but that allows you to shut off access to your credit reports, preventing thieves from opening new credit accounts. For more information, visit the Consumers Union site www.financialprivacynow.org.

Answer: Two other brothers have gotten a lot of heat for charging ski vacations to the company credit card. Their names are Mark and Andrew, and their dad’s name is Bernie Madoff. Ring a bell?

It is possible to combine a vacation with a business trip and deduct some of your own expenses. But writing off family members’ expenses, or even your own transportation costs if the trip was primarily for pleasure, isn’t smart. If she’s ever audited, your mother is going to have a tough time explaining how your brothers’ wine tab and her granddaughter’s skiing lessons qualified as a business expense.

The rules, which can be complicated, are laid out in IRS Publication 463, Travel, Entertainment, Gift and Car Expenses. But your mother clearly needs more than a pamphlet at this point. She should have her own tax professional, preferably a Certified Public Accountant or an enrolled agent familiar with rental property rules, to advise her and review her tax returns. Your brothers are playing fast and loose with tax laws and it’s your mother who could pay a big price if she’s ever audited.

Answer: It’s too late for you, but others who may be tempted to ignore their obligation to file tax returns need to know two things.

The first is that the failure-to-file penalty is much worse than the failure-to-pay penalty. Since the IRS offers payment plans, it’s better to file than not, even if you can’t pay right away.

The second is that you have only three years to file a tax return before you lose any refunds to which you might have been entitled.

In short, not filing can cost you, big time. You don’t need to throw yourself on the IRS’ mercy, but you should find a good tax preparer who has dealt with this issue before. Many have, as there seems to be no shortage of people like you. Your local certified public accountant society or the National Assn. of Enrolled Agents, at www.naea.org, can provide referrals.

Oh, yay.

Not only are taxes a pain to confront, but they’re easy to get wrong. Here are five big mistakes to avoid:

Failing to file. Every year, I hear from people who have hidden under a rock for years–years–when tax season rolls around. They want to come clean, but are afraid the IRS will send storm troopers to carry them away. Relax: simple failure-to-file isn’t a crime, although it can be costly. Failure to file penalties are much worse than failure to pay penalties, and you lose out on any tax refunds you might have gotten after three years have passed. The fix is straightforward: find yourself a CPA or other good tax pro, bring what documentation you have and take your medicine.

Doing complicated taxes themselves. I’ve used a tax pro ever since starting my first freelance business many years ago, and that was even in the years when I was doing our taxes eight or nine times a year to test out various tax software. My pro has always found deductions I missed and been a great resource year-round. If you’ve got a business or a lot of investments, find yourself an expert. At the very least, you should be using software like Turbotax–today’s tax code is simply too complex to tackle by hand.

Paying with a credit card. Whatever rewards you’re getting from using a card are more than offset by the fees charged to use plastic. If you can’t pay right away and have a very low rate on your card, charging could make sense, but the IRS’ payment plans also come with pretty low interest rates.

Using rewards points to pay your taxes. American Express just announced that you can do this with their rewards cards, but the exchange rate is awful. You need 200 points to pay $1 in taxes, according to CreditBloggers.com. (Normally, you want an exchange rate of at least 1 cent per point or mile; CreditBloggers points out you can get a $25 Barnes and Noble card on Amex’ site for 2500 points, and even the less desirable exchange rates that typically apply for merchandise typically give you 100 or so points to the dollar.)

Taking out a refund anticipation loan. If you file electronically and opt for direct deposit, you can get your refund in about 10 days. That’s all. It’s insane to pay an interest rate that’s effectively in the triple digits to get your money faster from a tax preparer that offers refund anticipation loans. If you need the money so badly, then file earlier in the season; your wait time may be even shorter.

You’ll have to pay regular income taxes on that money, but you won’t otherwise be penalized for trying to be aggressive about your retirement savings.

$1,500: That’s 10% of the average family’s tax bill they could recoup if they got on a better wireless plan, switched credit card providers, and drove to a cheaper gas station according to BillShrink.com.

60: The number of times around the Earth all the pages of tax forms and instructions filed each year by U.S .taxpayers would stretch if laid out end to end.

4/16: Unofficially known as “Divorce Day” because of the sharp increase in federal filings after plotting spouses have access to uploaded financial information

1916: Year in which the word “lawful” preceding “income” was removed from the Internal Revenue Code, making illegal income also taxable.

120: Average number of days a U.S. taxpayer will work each year to pay tax liabilities.

48: Number of hours within which you are required to pay sales tax to the Tennessee Department of Revenue for all purchases of illegal drugs.

351,191,000—Visits to IRS.gov in 2008, a 61% increase from 2007.

2015: Year in which electronic returns are projected to outnumber paper returns.

1817-1861—Years in which the United States Federal Government collected no internal revenue.

9,097,000—Number of words in the IRS tax code, a 652% increase from 1955.

Some key points to remember:

• If you cannot meet the April 15 deadline, you can ask for an EXTENSION OF TIME TO FILE. But getting an extension doesn’t mean you get a break from paying. You still must send in an estimated payment.
• The failure-to-file penalty for returns filed more than 60 days after the due date (including extensions) is the smaller of $135 or 100% of the unpaid tax.
• It’s best to file and pay what you can. Interest and failure-to-pay penalties will just increase the amount you owe. In some cases, the penalty and interest charges could increase your tax bill by 25% or more.
• You can work out an installment pay plan with the IRS. (CLICK HERE FOR DETAILS) However, you can save money by paying the full amount as fast as possible to minimize the interest and penalties you’ll be charged. It also costs you to set up these plans:  The user fee for new installment plans is $105 and $52 for plans where payments are deducted directly from your bank account.  (Some low-income taxpayers can pay a reduced user fee of $43 for setting up the plan.)
• Lost your job? Severance pay and unemployment benefits are taxable. (Hopefully you had tax withheld or made estimated tax payments to avoid a big tax bill.) Food stamps are not taxable. For more info on job-related tax issues look for PUBLICATION 4128, TAX IMPACT OF JOB LOSS.

More info: check out my answers to other tax questions:

• Who realistically would itemize their deductions?

• Employers who do not withhold payroll taxes

• My son doesn’t declare income from renting out rooms

Also online: You can always visit the IRS site for forms and tips at www.irs.gov