“Dear Steve,
We are in a situation out of our control. We had a forclosure do to the drop in market. We tried to short sale only to be denied after 6 months by the lender. There was a 2nd mortgage on the property. This whole process took place in 2005. Then in 2007 the 2nd wrote a cancellation of debt and then 1099 C us in 2010. We submitted the 1099 C with our 2010 taxes and paid taxes on it. Now they are reporting that we still owe the debt on our credit. Is this possible? Or does the 2nd fall with in the Obama plan?
Eva”
Dear Eva,
Well actually the discharged debt should have actually been claimed on you 2007 tax return. At that time you may have been insolvent and not had to pay taxes on the forgiveness.
I just published “How to Deal With a New 1099-C Issued on Old Debt Using Little Known IRS Form 4598” which contains information related to this situation. I’d first suggest following the process in that article regarding errant and late 1099-Cs you received with the Form 4598.
I seriously doubt it falls within any recent government approved modification plan but if it was taxes due from the loss of your house then there was an exception for that and taxes would not have been due. See this IRS publication from 2010. The bigger issue is unwinding the error in the wrong reporting years.
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when you file form 928, you must show that you were insolvent on the date the debt was cancelled. you do not still have to be insolvent. you need a different form 928, and insolvency worksheet, for each date you have cancelled debt.
Nice clarification.