Form 1099-A, Form 1099-C and IRS Audits of Real Estate Professionals


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Most of the real estate-related headlines continue to be about the depressed market and foreclosures. In my world, the tax world, there are two tax trends that we’re watching closely.

#1: Lenders continue to send out nonsensical Form 1099-As and Form 1099-Cs, or send none at all, or send them years after the foreclosure. And if you fail to report the information correctly, you get a penalty.

Here’s the way it is supposed to work:

  • Form 1099-A is used to report a repossession or foreclosure. If your house or car is taken back by the lender, the lender will report the FMV (fair market value) of the property received, the amount of debt they have on the property and check a box as to whether you are personally liable.
  • Form 1099-C is used to report Cancellation of Debt income. For example, if the lender forecloses on your house and then later sells it for less then the debt, the lender can either come after you for the difference or forgive the debt. If the debt is forgiven, there is COD income, which is taxable.

Generally speaking, the Form 1099-A should be reported as a disposal of business or investment property. This would go on Schedule D or Form 4797.

Problems:

You don’t receive the Form 1099-A in time, or at all.

The form says you are responsible for the debt when you’re not or it says you’re not responsible for the debt and you are.

The FMV is way too low or way too high.

Each case is different, of course. Generally speaking, you need to report the disposal even if the lender doesn’t give you the form. The debt responsibility often is a clue on whether they plan to chase you down for balances due or give you a Form 1099-C. At this point, there isn’t a lot to do. In the case of the FMV, the instructions for Form 1099-A say that you should use the lessor of the debt amount or FMV for the sales price.

#2: IRS Audits of Real Estate Professionals continue to be a problem.

We’ve had some nice case wins that establish the IRS is wrong in a lot of their earlier positions regarding Real Estate Professionals. The problem is that too many taxpayers aren’t aware of the very specific language you must use when you’re working through an audit. As a result, they don’t meet the specifics of the Tax Court cases and so they end up losing. Most of the time, the audits go against the taxpayer because the audit was mis-managed by the taxpayer, not because the facts of the case were against them.

Solution:

Get good representation and make sure you’re both prepped by knowing what the agents are looking for, and providing just that information in the right way, at the right time.

Find Your Hidden Business Deductions

The 2011 IRS Survival Guide for Real Estate Professionals with Real Estate Investments

Operation Guide for LLCs with Real Estate Investments

Sidestreaming Income: How to Reduce Your Tax Burden

Tax Law Updates for 2010-2011

Tax Strategies for Real Estate

Tax Survival for 1099-A and 1099-C Recipients

2011 Understanding Financial Statements

What to Expect in Taxes for 2011


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One Comment so far:


On January 25th, 2012 | 7:10 pm
Leann said:

I shortsold my home in November (through the FHA Preforclosure program), so I am not liable for the debt.

On my 1099-C the bank sent me, The amount of cancelled debt was correct however they put $0 for the FMV. Also, they did not select (X) for box 5 which states “If checked, the debtor was personally liable for repayment of debt.”
When I inputted the information as is into Turbotax, it calculated that I owed all sorts of taxes on this, while I actually qualify for the Mortgage debt relief act of 2007.
My interpretation is that the box should have been checked since when the debt was created (or at last modification) I WAS personally liable. I corrected by adding the appraisal for the FMV and selecting that I WAS personally liable and then TurboTax said I did not owe money on this debt forgiveness.

When I talked to the CPA through Turbotax.com, she told me “You contacted us regarding entering information from Form 1099-C, cancellation of debt, regarding your home short sale in 2011. Due to the Mortgage Debt Relief Act of 2007, you do not have to include this info on your taxes since you meet one of the prime exceptions.”

Is that right?? Won’t I be flagged for an audit?

Please advise, thanks!



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