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.