You would think that after losing your home to foreclosure that your nightmare would be over. Right? It could be over, unless you receive a 1099-C on your foreclosed home and a subsequent letter from the IRS regarding the 1099-C. I've talked to people who've received this form and it can be a big problem, unless you handle it properly.
What is a 1099-C?
It’s a dreaded form that causes your nightmare to return. Basically, it’s an IRS form that has to do with a homeowner (or any consumer with debt) having their debt (in this case, mortgage) forgiven, cancelled or discharged, It’s considered income when that debt goes away. The full amount of the debt is added to your gross income. And that income is taxable. Like I said, the nightmare continues.
There IS hope.
While it’s not a mistake that you received that form, you do have a potential out. You have to demonstrate to the IRS that you can qualify for an exception (or an exclusion).
If you received a 1099-C or (1099-A), here is what you should do:
- Respond to ALL IRS communication. It’s not going to go away and could end-up getting worse and more costly.
- Hire help. IRS forms, especially this one, are complex. Hire a tax professional who has experience with the 1099-C or 1099-A form.
- File for an exception (or exclusion). As stated above, hire professional help on this one. You are going to file IRS form 982, along with potential other forms.
- What else? You are showing the IRS that you are insolvent (unable to pay debts). If that is the case, you may not have to show the debt as income on your taxes. You may have to file for bankruptcy, that is up to the professional helping you.
- Bottom line. Be proactive and work through it quickly. Otherwise, it will get worse and eat you up emotionally.
FYI-I am not an attorney or a tax professional, so seek legal advice on any correspondence you get from the IRS. While this is an outline of what to do, it by no means replaces the need for professional advice.