Common Reporting Problems
Form 1099's are chock-full of reporting errors!
Over the years, I have advised hundreds and hundreds of individuals and professionals about Form 1099's in general, and Form 1099-C's in particular. The Numero Uno concern is that what's reported is accurate. I'd say at least 90% of all of Form 1099's that I have seen have at least one error, and more than one out of every two have a really serious error that will directly impact the taxpayer's bottom line. That's right→ HALF!
The most common problem is the address of the Borrower (or Debtor or Transferor, depending on the form). The Borrower has moved elsewhere, and is no longer receiving mail at the last known address reported by the Lender (or Creditor or Filer, depending on the form). It is ABSOLUTELY CRITICAL (it that clear?) for the taxpayer to have the USPO forward mail to a current address. Go to the local post office and get the forms. They are also available online, but you have to deal with an almost impossible web site hawking stuff having absolutely nothing to do with your address forwarding. Once implemented, first class mail is forwarded up to a year. After a year, well, rots of ruck.
Foreclosures are especially problematic. The confirmation of the sale is often months after the homeowner has moved, and the Lender doesn't send out the Form 1099's until the January of the year following the foreclosure. So in situations where more than one year has lapsed from the January reporting period, the taxpayer will not get the form in the mail. But the IRS surely will get its copy, and has hired thousands of workers who will match the forms to the returns filed. The IRS has your SSN and probably knows where you are if you have filed a tax return. If you haven't dealt with what's reported, you could, would, should get a surprise IRS assessment (dealt with elsewhere).
I'm not sure how to fix this problem. I'd think long and hard about telling the Lender or Creditor where you presently reside, for what should be fairly obvious reasons which I am not going to explain here. With residential foreclosures, failure to report the sale is no big deal, because losses from the sale of a principal residence are not deductible anyway (explained elsewhere). But if you are dealing with property used in a trade or business, or have canceled debt, this is a REALLY BIG DEAL. You want to report business losses because this could be Big Bucks ($$$s) in your pocket, and secondly, you want to report canceled debt, because the IRS will make sure that you deal with it. Moreover, the taxpayer is still responsible EVEN IF no Form 1099 was received (explained elsewehere). You can get the information from source documents, such as court house public records or bank statements. But that's a challenge and your numbers need to match what's actually reported—and guess what?—you don't know what's been reported. And often what's reported is wrong.
Now let's talk numbers. Creditors have difficulty getting the amount of canceled debt right. They will never tell you how it's calculated, and the best you can do is reconstruct the situation using source documents and hope your number is close. And if business interest (i.e., a finance charge) is involved, it's critical to get that number right, because business interest is deductible and an amount otherwise deductible is not canceled debt (discussed elsewhere). Same with other deductible amounts included in the amount reported as canceled debt. If you're not backing out these amounts, you are paying waaaaay too much tax. No doubt about it!
The reported fair market value in a short sale is easy to establish (just look at your HUD-1 statement), but with foreclosures, you really need the source documents to determine what happened to the gross proceeds. For example, if real estate taxes are charged against gross proceeds from the foreclosure sale, you should get the deduction, but that's not even reported on Form 1099-A. If the Lender gets the fair market value wrong, it could cost the taxpayer thousands of dollars, because it is from that amount that you calculate the gain or loss on sale. It's an insideous issue.
With Trustee's deeds, fair market value is tough to substantiate since it's neither a court proceeding nor an arm's length transaction. And "deed-in-lieu's" are a black hole as there really is no fair market value to report. You would need to deal with the county auditor's office to take a look at transfer taxes paid and figure it inversely to get some kind of value, which is usually picked out of thin air so that the least amount of fees are paid. It's a racket.
Determining whether debt is "non-recourse" is important, because it is axiomatic that the discharge of non-recourse debt is never cancellation of debt income. However, it could create a tax consequence in many situations, but it certainly isn't cancellation of debt income (discussed elsewhere). So everyone is off to the races searching for the holy grail of non-recourse debt. This search usually is futile. Why would a bank loan you money and not make you personally liable to repay it? Just asking.
I'm convince that most people and institutions generally have no idea what "non-recourse" debt is. I'm not even sure anymore. For example, if you have the original purchase money security interest for a home in California, by statute, it's probably non-recourse, but if you refinanced at any time, now it isn't. Who hasn't refinanced at least once. And a big "Thank You" to the Supreme Court of Arizona for taking a nearly incomprehensible position on the Arizona anti-defeciency statute, claiming that a homestead loan is "non-recourse." Of course, this ruling is not necessarily binding on the IRS (federal preemption). And the federal courts are divided into 94 judicial districts with 11 circuit courts of appeal which all can't agree on this, so the rules depend where you live, perhaps, or where the property is located, maybe, or where the parties agree as to what law applies to the loan documents, which is yet another place.
The reported date when debt is canceled is the most mysterious date of all. I've seen one creditor send out a Form 1099-C nineteen years after the debt was canceled. That's the record so far. Sometimes the creditor doesn't get around to it for several years. This impacts the tax year in which the taxpayer reports the canceled debt income. Sometimes it helps; sometimes it hurts. And if debt becomes uncollectible—and thus canceled—due to the tolling of a statute of limitations (discussed elsewhere), I've never seen a creditor report that that has occurred, much less get that date correct.
Most bankruptcy attorneys will not even touch upon the tax consequences of canceled debt in the context of personal bankruptcies. I guess that they aren't paid to advise their clients on tax issues arising from bankruptcy. All I can say is "G*d help you" if you decide to reaffirm any debt connected to an asset, i.e., a personal residence. And, if you don't report the discharged debt from the bankruptcy on Form 982 for the year in which you were granted the discharge, then what are you going to do when one of those creditors sends you a Form 1099-C three years after the fact?
I can rant on and on, but this is enough. Suffice it to say that there are lots and lots of substantive and procedural problems and hurdles. You not only require an erudite understanding of how the law works—as well as how the law doesn't work—but you also need lots and lots of practical experience to understand how to fix these problems without doing even more damage.
I welcome your questions and comments. I keep everything confidential. My staff and I want to help you. Call me. Or, use the fill-in form at the top of the right column. I look forward to hearing from you!
OUCH! Audit & Penalties
The IRS is reasonable, but they think you screwed up!
If you fail to report something that's reported on a Form 1099, chances are you are going to be assessed. The IRS has an extensive program to match the forms to the tax returns. You didn't think that filling out all these Form 1099's didn't have any tax consequences, did you?
You'll get a nice letter indicating that you failed to report something, and you've got plenty of time to deal with it. IRS revenues agents are very well aware that, for any number of legitimate reasons, you might not have gotten the Form 1099 in the mail. They'll report to you the information contained in the form. Then, it's up to you to either accept it or reject it. If you accept it, you accept the changes that the IRS made to your tax return. Sometimes you've made mistakes elsewhere, and that may get you money back even with the other adjustments. That happens fairly often.
On the other hand, if you reject the assessment, you have plenty of time to explain your situation to the IRS and substantiate why this information is wrong, or how it affects your tax return differently than the IRS proposes.
The IRS really wants to work with you to resolve the matter. They will listen to you. A well prepared position statement with supporting documentation goes a long way. I'm batting 100% in closing out these assessments to the satisfaction of both the IRS and taxpayer. (This is not to say that I can resolve everything. Quite to the contrary: I know when to fold.) Penalties will be waived if you are reasonable. Interest usually isn't a big deal, ½% per month simple interest.
If the matter escalates, you'll get the dreaded "90 day letter." That's the amount of time you have to try to resolve the matter, or petition the tax court, which is an expensive, time consuming proposition that I do not recommend unless there is a lot of money on the table. The IRS has a special department which will continue to work with you even if the 90 days expire. And there may be other ways around this deadline.
The bottom line is that, if you do nothing, you will get clobbered.
As to penalties, if the Lender (or Creditor or Filer, depending on the form) fails to issue a Form 1099 as required, the penalties are pretty paltry. It's just not enough money to make these people worry much. And, I'm not aware of a penalty ever being assessed against a Lender (or Creditor or Filer) for preparing a Form 1099 with incorrect information. If you bring this to the attention the IRS, they'll just tell you to work it out with the Lender and have them issue a "corrected" form. Yeah, good luck!
You can be palpably pounded by a panoply of potentially pricely penalties piled upon an improperly prepared tax return: failure to pay penalty, failure to file penalty, failure to deposit penalty, substantial understatement of tax penalty, negligence penalty, yada yada. There are special procedures to abate the penalties, but you should not be in this space in the first place.
Again, if you act promptly and reasonably, the IRS will work with you to resolve your situation. If all else fails, you've got your National Taxpayer Advocate. Or, better yet, hire a knowledgeable tax professional to deal with your situation and avoid these pitfalls.
Got a question? I have the answer.
Please complete this form. I'll personally respond, promptly.
☎ Or, call me now at (513) 739-7899.
Look, here's an offer you can't refuse. I would be pleased to discuss your situation with you confidentially and without charge for an initial consultation. It's really that simple. You have no obligation to engage my services before, during or after your initial call.
I'd venture a guess that you really need some solid tax advice. Otherwise, you would not be reading this!
I have a tremendous amount of experience in resolving these tricky tax problems. I represent people just like you—coast-to-coast. I'm confident you'll agree that I charge a reasonable fee for my professional
services, custom tailored to meet your needs and budget. Contact me right now.
David N. Stonehill, Attorney-at-law
Links & Resource Materials
1099advisor on the Radio
David Stonehill has been a frequent guest on radio talk shows.
Click on the link below, and theYahoo! Media Player will magically appear!
These are Dave's recent appearances on Lewis Gatch's "Everybody's Planning Hour" radio show. Dave talks about what creates cancellation of debt income, why it's taxed, and how to avoid paying too much tax on it.
United States Tax Code
IRS Publication 525.
Taxable and Nontaxable Income
Revised January 1, 2012
IRS Publication 527.
Residential Rental Property (Including Rental of Vacation Homes)
Revised December 30, 2011
- IRS Publication 544.
Sale and Other Dispositions of Assets
Revised March 30, 2011
- IRS Publication 551.
Basis of Assets
Revised January 13, 2012
- IRS Publication 925.
and At-Risk Rules
Revised January 12, 2012
IRS Publication 946.
How to Depreciate Property
Revised April 6, 2011
IRS Publication 4681. Canceled Debts, Foreclosures, Repossessions and Abandonments
Revised January 12, 2012
Words of inspiration?
Advice from our National Taxpayer Advocate …
Just great, our National Taxpayer Advocate twice confirming on YouTube that these laws are "very complex." She lays out your options: You can (1) try to figure it out yourself with 24 pages of triple-column instructions, or (2) go visit an IRS Taxpayer Assistance Center and take a number, or (3) call the IRS to be put on hold forever, or (4) seek help from VITA, if available, or, if all that fails, then (5) you can contact the Taxpayer Advocate Service.
Or, as she recommends, "you might also consider seeking qualified professional help when facing this issue." Now that's good advice.
Where do you go from here?
Home: This web site's landing page.
IRS Form 1099s: What are these forms?
Canceled Debt: What is COD income?
Typical Situaitons: Examples of COD income.
Exclusions: How to exclude COD income.
Contact Us: 4 ways to contact me … right now!
This website is designed for general information only, and should not be construed to be formal tax advice, as advice appropriate for you will depend upon the particular facts and circumstances of your situation.THIS IS AN ADVERTISEMENT
The laws governing legal advertising in various jurisdictions may require the following statement:
*Please read this important information