1099-C Archives - Chicago IRS Tax Attorney

IRS 1099-A 1099-C Confused Yet?

February 17, 2017 by admin

Steven A. Leahy

IRS 1099-A 1099-C Confused Yet?

It’s tax season. Each year, at tax time, many taxpayers receive a 1099 A or a 1099 A and have no idea how to handle them. So, many just ignore the forms and go about filing (or not filing) their tax return. This is a BIG mistake!

Form 1099 C – Cancellation of Debt – is a form used by financial institutions to report cancelled debt to the IRS. “Cancelled Debt” is debt that has been cancelled or forgiven for less than the full amount.

Form 1099 A – Acquisition or Abandonment of Secured Property – is a form used by lenders if they acquire secured property in full or partial satisfaction of a debt, or they have reason to know that the property has been abandoned. Does that make it clear? Who must file? When do you “reasonably know” the property is abandoned? Trying to decipher these definitions is the subject of many Judges’ opinions.

As the borrower, you receive these forms and must respond. But how? Often, a lender will send a 1099 A and a 1099 C. What happens then? If there are multiple borrowers, each may receive a form for the full amount. Whom must report? A borrower may receive multiple forms, if there are multiple lenders to the same piece of property. All good questions – without straight forward answers.

First, Form 1099 A. Typically, a homeowner will receive a 1099 A from a lender(s) after a piece of property is foreclosed. For tax purposes, a foreclosure is treated as a sale. The borrower must calculate capital gains or losses. Since the property wasn’t sold, there isn’t a selling price. Instead, the borrower uses the information on 1099 A as the date of sale [Box 1] and the selling price of the property. The borrower may use the fair market value [Box 4], or the outstanding balance [Box 2]. How to report the foreclosure on your tax return depends on the nature of the property (primary residence?), the state the property is located, and the purchase price.

Next, Form 1099 C. If you receive a 1099 C for a foreclosed property, you should not (but may) receive a 1099 A. Because the 1099 C has the same information as 1099 A, and also includes the additional information that the debt has been cancelled. Cancelled debt may require the borrower to report the cancelled amount as income. That’s right – you couldn’t pay the debt, but the IRS may add the cancelled amount to your gross income and require you to pay income tax on that amount. Talk about kicking you when you’re down.

The good news is, sometimes there are exceptions and often the borrower may exclude the forgiven debt from income. For example, if the debt was discharged in Title 11 Bankruptcy, if the borrower was technically insolvent for an amount greater than the forgiven debt, or if the debt was forgiven on a qualified principal residence.

All this can get VERY complicated! If you receive one or more of these forms in any tax year, I suggest you find a good tax preparer. Do not ignore the forms AND do not prepare your own return. I help people get out of the trouble caused by those you take care to this matter themselves. Get help! Here’s an idea – Call Opem Tax Resolutions & The Law Office of Steven A. Leahy, PC (312) 664-6649. Call NOW to set up your FREE Consultation.

What is a 1099-A?

February 16, 2015 by admin

Steven A. Leahy
What is a 1099-A?

By Steven A Leahy

For the last several weeks we have been discussing 1099-Cs on The IRS Radio Hour. Any discussion of 1099-Cs naturally leads to the question – What is a 1099-A? This post will address that question.

As we discussed, 1099-C is a tax record sent by financial institutions to debtors when the lender forgives or cancels a debt in excess of $600.00. A 1099-A Acquisition or Abandonment of Secured Property is a related document for “[c]ertain lenders who acquire an interest in property that was security for a loan or who have reason to know that such property has been abandoned.” Generally, a taxpayer will receive this form in the mail after losing a property to foreclosure, or an automobile to repossession. Often, a taxpayer will receive both a 1099-A and 1099-C.

There is a lot of confusion out there on exactly which tax document a lender should send out. That’s why there isn’t consistency. Some lenders will send out a 1099-A after a foreclosure; others will send out a 1099-C; still, others will send out both forms, just to cover themselves. Some lenders may send a 1099-A first, to report the foreclosure to the IRS, and a 1099-C later, to document the decision to cancel the debt. It is vital that these documents are treated correctly for tax preparation purposes. A mistake may result in tens of thousands of dollars in IRS liabilities.

1099-As contain three important pieces of information, found in Boxes 2, 4 and 5. First, Box 2 reports the principal loan balance. Box 4 reports the fair market value (FMV) of the foreclosed property (generally, the price the house sold for at the foreclosure auction). Finally, Box 5 reports whether the taxpayer is personally liable for repayment: recourse vs. non-recourse. The very same exceptions and exclusions available for 1099-C income, are available for 1099-A income. Notably, Title 11 (bankruptcy), “Insolvency Exclusion,” and the exclusion offered by the Mortgage Forgiveness Debt Relief Act (MFDRA).

Some important information regarding the tax implications are not included on Form 1099-A. If the property that was lost was an investment property, rather than the taxpayers principle residence, the taxpayer will also need to supply the basis for the property ((Cost + improvements) – depreciation) in order to calculate the tax implications. Investment property losses may be fully deductible.

The key to excluding or exempting 1099-C debt forgiveness, and 1099-A property abandonment, from taxable income lies in tax preparation. If a taxpayer qualifies for an exception or exemption and fails to prepare the appropriate IRS forms, the IRS will complete an examination and assess a deficiency for that tax year. In addition to attaching the 1099-A or 1099-C to the taxpayer’s tax return, often IRS Form 982 Reduction of Tax Attributes Due to Discharge of Indebtedness is also required. Form 982 is used to determine the amount of discharged indebtedness that can be exempted or excluded from gross income.

If you are considering hiring a tax professional to complete your 2014 tax return, consider giving Opem Tax Resolutions and The Law Office of Steven A. Leahy, PC a call. We prepare old unfiled tax returns, as well as current returns. So, if you are a number of years behind in your filing, we can help get you in compliance with the IRS. Call (312) 664-6649 today and ask Bonnie to set up a time to talk me about your tax returns.

If you have an ongoing IRS problem – installment agreement, recent offer-in-compromise or currently not collectible status I recommend the IRS Protection Plan offered by Opem Tax Resolution and the Law Office of Steven A. Leahy, PC. This program anticipates the tax compliance requirements including, timely tax preparation, on-going IRS monitoring, resolution of IRS actions (cancellation of installment agreements or currently not collectible status and defaulting an offer in compromise). In addition, developing a relationship with a tax team will give you access to tax planning to avoid IRS problems in the future and minimize your tax burden.

What is a 1099-C?

February 9, 2015 by admin

Steven A. Leahy
What is a 1099-C?

By Steven A Leahy

Last week on The IRS Radio Hour, in the question segment, I answered a question about 1099-Cs. I realized that there were a lot more questions about 1099-Cs, so this post will address some of those questions.

A 1099-C is a tax record sent by financial institutions to debtors when the lender forgives or cancels a debt in excess of $600.00. The IRS views the cancelation of debt as a taxable event. That’s right. If a creditor forgives a debt you owed because you could not afford to pay the debt, the IRS may tax you on the forgiven amount. In fact, even if the amount forgiven is less than $600.00, the taxpayer is expected to report that amount as income – even though the financial institution is not required to send a 1099-C.

Generally, taxpayers are to report the 1099-C amount as income. There are, however, certain exceptions and exclusions that often protect the taxpayer from paying additional tax. There are 6 exclusions or exemptions. For example, if a taxpayer has filed for protection under Title 11 (bankruptcy) the discharged debts are not considered taxable income. The “Insolvency Exclusion” is another good example that will protect some taxpayers from 1099-C incomes. To determine if a taxpayer is insolvent at the time the debt is forgiven one looks at assets and liabilities. If liabilities are greater than assets, the taxpayer is technically insolvent. The Insolvency Exclusion only protects a taxpayer to the extent of their insolvency.

In my practice, I see forgiven debt most often in connection to foreclosures or short-sales. After a short-sale or foreclosure sale, the mortgage company often forgives the balance and issues a 1099-C (or a 1099-A, but we will leave that for another blog post). The homeowner is often surprised to receive this tax document and wonders how this will affect them.

In addition to the exclusions mentioned above, Congress passed the Mortgage Forgiveness Debt Relief Act (MFDRA) in 2007. MFDRA has been extended a number of times, most recently on December 16, 2014. MFDRA expired at the end of 2013, so the most recent extension came at the 11th hour and was retroactive – but does not extend beyond the 2014 tax year. That means it will take another act of Congress to extend the Act into 2015 and beyond. Generally, the MFDRA allows a taxpayer to exclude the 1099-C forgiven debts from income if the forgiven debt (up to $2 million) relates to the taxpayers principal residence, regardless of insolvency.

The key to excluding or exempting 1099-C debt forgiveness from taxable income lies in tax preparation. If a taxpayer qualifies for an exception or exemption and fails to prepare the appropriate IRS forms, the IRS will complete an examination and assess a deficiency for that tax year. I have a client that received a 1099-C for a foreclosed property. She used one of the big chain tax preparation companies. The 1099-C was not properly accounted for and they failed to file Form 982 – Reduction of Tax Attributes Due to Discharge of Indebtedness. The IRS conducted an examination (audit) and assessed more than $100,000.00 in additional taxes, penalties and interest. All of this could have been avoided if she had sought advice from a tax professional versed in these matters.

If you have a ongoing IRS problem – installment agreement, recent offer-in-compromise or currently not collectible status I recommend the IRS Protection Plan offered by Opem Tax Resolution and the Law Office of Steven A. Leahy, PC. This program anticipates the tax compliance requirements including, timely tax preparation, on-going IRS monitoring, resolution of IRS actions (cancellation of installment agreements or currently not collectible status and defaulting an offer in compromise). In addition, developing a relationship with a tax team will give you access to tax planning to avoid IRS problems in the future and minimize your tax burden.

IRS 1099-A 1099-C Confused Yet?

IRS 1099-A 1099-C Confused Yet?

What is a 1099-A?

What is a 1099-C?

Our Resources

Testimonials

Our Office