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How Do I Deal With These Back Taxes and 1099-C I Just Got?

Written by Jim Buttonnow

“Dear Jim,

I am dealing with several major tax issues with the IRS right now and my situation is very complicated — I really need your help.

I am a single female in my 50’s, unemployed, without any income, and have not worked since 2006 due to medical reasons.

In March, 2008 I filed a Chapter 7 bankruptcy when my primary residence was in foreclosure, but my bankruptcy ended up getting dismissed not discharged due to a debtor class certificate that wasn’t filed by the deadline.

At that time I included at least five years of old tax debt dating back to 2000 and earlier, an equity loan for $80,000 secured by my house, and unsecured debt, all of which were listed on my Chapter 7 bankruptcy but were never discharged. I had planned to either re-open my original Chapter 7 bankruptcy , or file a new Chapter 7 bankruptcy in the next 12 months or longer.

I found out that Suntrust Bank filed a 1099-C with the IRS in 2013 for the $80,000 equity loan which was cancelled due to the foreclosure sale on my primary residence in 2008. The Mortgage Relief Act of 2007 excludes loans from being reported as “income” if they were cancelled or forgiven in 2007-2013 as a result of a foreclosure on their primary residence.

Since this equity loan meets the requirements for relief under the Mortgage Relief Act of 2007, does Suntrust have an obligation to correct or remove this 1099-C that was reported in error, and is there a penalty if the lender does not take action to comply with this Mortgage Relief Act?

How do I go about getting this 1099-C removed or corrected – do I go through the lender or through the IRS? I need your help on the fastest way to get this 1099-C matter resolved because this 1099 income is preventing me from making any formal payment arrangements with the IRS to stop collection action. Otherwise, I have to file a tax return for 2013 with the IRS, but this could take up to 8 weeks, an d this will not hold collection action.

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What is the statute of limitations on collecting old IRS tax debts and how many years can the IRS go back to collect old tax debts?

Can I go back and re-open my old Chapter 7 BK, and if so, is there an advantage to reopening my old Chapter 7 versus filing a new Chapter 7?

Was Suntrust supposed to submit a 1099-C to the IRS showing taxable income for 2013, even though the equity loan is not supposed to be taxable income since the loan was cancelled due to the foreclosure of a principal residence in 2007-2013 per the rules of the Mortgage Relief Act of 2007?

If the lender does not comply, are there penalties and fees if the lender does not take any action to correct or update the 1099-C?

THANK YOU FOR YOUR HELP WITH THIS MATTTER!

Jennifer”

Hi Jennifer:

Here are the answers to your issues:

Form 1099-C taxability: Because you received a Form 1099-C for cancellation of indebtedness, you will need to report it on your tax return. However, if you meet the income exclusion for the primary residence, you can exclude the income from your taxable income on your return. You would do so using Form 982 when you file your return. You do not need to ask the lender to change the 1099-C as you report the exclusion on your return. Beware that the residence exclusion is complicated when equity loans are involved because the IRS generally only excludes amounts used to build or improve the residence, not to “cash out” on equity.

Statute to collect on back taxes: The statute of limitations to collect (CSED) is 10 years from the date that the tax is assessed. However, the statute can be extended for certain actions – one action that extends the statute is filing bankruptcy. Bankruptcy extends the statue for the time the bankruptcy is in court plus 6 months.

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As far as the bankruptcy, you should speak directly with your bankruptcy attorney and discuss all of your facts, including the qualification to discharge of taxes and other debts. Bankruptcy requires a full understanding of specific facts of your situation.

Thanks,

Jim

If you have a tax question you’d like to ask just use the online form. I’m happy to help you totally for free.




About the author

Jim Buttonnow

Jim Buttonow, CPA/CITP, practices in the area of IRS and State tax controversy. He has more than 29 years of experience in IRS practice and procedure. Reach Jim at [email protected] or through his website www.buttonowcpa.com

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