Issues with a Form 1099-A “Acquisition or Abandonment of Security Property” or Form 1099-C “Cancellation of Debt” were the biggest tax issues we heard about over the past few weeks.
It seems like the banks and the IRS phone answerers are just as confused as taxpayers about what these are, when they should be issued and what you should do if you get one. Or, worse yet, what to do if you should get one and you don’t.
Let’s first look at the Form 1099-A. It is used to report property that has been taken by a lender. They are supposed to get them to you within 3 months of taking possession. Unfortunately, in today’s economic times, many banks start the procedure, but don’t complete it. You may think you’ve given over the property in foreclosure, but it hasn’t happened. Or at least the bank doesn’t think it has.
Foreclosure or D-I-L = Form 1099-A
You won’t get a Form 1099-A if you do a loan modification or a short sale. But you should get them every single time if you have a foreclosure or a deed-in-lieu of foreclosure. A lot of lenders are getting that one wrong.
If you don’t get a Form 1099-A or a Form 1099-C, contact the lender. If they don’t intend to give you one, and yet they have taken your property, you’re in a bit of a pickle. You need to report it, but they haven’t given you the information to do so. At this point, let it go, but document that you attempted to get the information.
If your lender has given you a Form 1099-A showing you are on the hook for the loan and that it is upside down (FMV on the form is less than the debt due) then you may or may not get a Form 1099-C. This is where it gets dicey.
Form 1099-C = Debt Forgiveness = Tax Due
Some banks are taking the position that they don’t have to forgive the debt, when state law says they have to. Expect some court cases about that down the line. But meanwhile, they aren’t giving you a Form 1099-C. The Form 1099-C says they have forgiven the debt. And they save they haven’t. State law says they must.
So what do you do? Technically, you don’t need to report the income from the debt forgiveness, but there could be a good reason to report the cancellation of debt income anyway. That’s especially true if you can qualify to exclude the income due to personal residency exemptions, insolvency or bankruptcy.
Form 982 = Excluded Income
If you qualify for one of the exclusions, make sure you file Form 982 along with your return.
What if you’ve made a mistake with the return you just filed? Call a professional. You may want to amend your return.