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wingwalker

Tax Tangle: 1099-Cs for Old Mortgage Debt Cancellation 1 Week before Foreclosure (+ credit cards)

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Hi all,

 

I'm busy tying up old federal tax loose ends and could really use some expertise here. If I need to consult a tax attorney I will, but there's really just one major blank space for me.

 

2011 was an awful year for me. After losing about 90% of my income in mid-2009, I scraped along for a couple of years, trying to stay in the house until my kiddo graduated from high school. We got that done, but it was at a disastrous cost to my credit and finances.

In mid-2011, my FICO in the low 500s, and after four attempts to get a loan modification for WaMu, and then Chase when they bought them out, I finally hit the wall that July when my last attempt to get a mod was rejected by Chase.

 

In the meantime, I moved, forwarded the mail, but didn't get a *lot of forwarded mail, especially regarding this issue (including the 1099s and the resulting tax lien documentation... I didn't discover that until it showed up on my credit reports).

 

To add to the fun, several credit cards submitted 1099-Cs after they were CO'd - adding up to about $25K all together.

Here's the relevant timeline:

July 2011 - HAMP modification rejected by Chase

Late September 2011 - Debt canceled by Chase. 1099-C issued
Fair market value was about $14K higher than the amount canceled.

Early October 2011 (about a week later) - Property/house was sold: Foreclosed to the lender for the fair market value. I did *not file a deed-in-lieu of foreclosure, which the HAMP rejection letter warns would have tax consequences. The house was listed for sale at auction in my county.

Early 2012 - Property/house was purchased by a couple for about $18K more than the FMV/foreclosure amount and about $30K more than the amount of debt canceled.

Some while later (I admit I was in a horrible place and didn't deal with these taxes in a timely manner), the IRS filed a substitute return that included the six-figure debt cancellation for the mortgage (not the difference between the fair market value and the amount canceled) plus the credit cards. And fees, penalties, etc. Once I get this return filed, these should get reversed according to several agents I spoke with.

I've read that by filing IRS Form 982 with that year's taxes, I can request that these 1099-Cs be excluded from being included as income, as I was most definitely insolvent ... and by a huge margin.

I'm still reading through the reams of information that I've saved on the subject, as well as posts in the Foreclosures, Mortgage, and Credit forums.

 

Here are my questions:

1. My primary question: If the property was sold for more than the foreclosure amount - after the foreclosure and the debt was canceled - is the 1099-C still valid? I obviously didn't receive any gain - lost the house, didn't receive anything in the sale, and had the foreclosure of the first and second mortgage on my credit report for seven years.

2. When you request exclusion based on insolvency, does the IRS require documentation of every dollar that you owed? My indebtedness was very high and magnitudes more than the income they're assigned through the 1099-Cs. My actual income was less than 10% of the 1099-C income that was filed for that year.

I pulled my credit a few times during that time, but those files are on an old, dead computer. I would still qualify as insolvent even if they used this year as the yardstick.

3. I don't know which number (FMV or debt canceled) they used, as using the debt canceled amount plus my other 1099-Cs and actual income was less than the adjusted gross income amount that they substituted. I think they used the FMV. I can ask if need be.

4. The instructions for the Form 982 are pretty confusing, and I'm not sure whether I should file one for the mortgage foreclosure and one for the credit cards.

 

5. On edit: I see that there's a Form 4681 (Canceled Debts, Foreclosures, Repossessions & Abandonments) involved too. More reading.

I also see that if the mortgage 1099-C was incorrect, I can dispute it through the IRS agent, but even if Chase resubmitted the correct one, I'd still be insolvent.

Has anyone been through this before? I truly appreciate your help and thank you!

Edited by wingwalker

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