Taxable Debt Relief - Do Ask - Do Tell
© By William J. Purdy
Law Office of Simmons & Purdy
Are you currently facing foreclosure? Was your home foreclosed upon in the last 4 years? Are you considering short selling your home? Did you short sell your home for far less than what was owed to the lender(s)? Have you received a form 1099-C and/or a form 1099-A from the lender(s)? If so, you’re one the new walking wounded.
For some strange reason no one realizes the implications of the fact that middle class taxpayers of America bailed out the financial industry with their tax dollars. Depending on whose estimates you trust, that means we taxpayers covered 7.2 trillion of the banks’ debts. This staggering figure includes over six hundred billon in cash given out freely to banks, with less guidance than a parent would give an errant child. What were the requirements placed on the financial industry by Congress? None.
Do the taxpayers whose money saved the banks have any right to a real loan modification that allows them to keep their homes? Absolutely not. Have the banks paid reparations to the federal government and/or the state governments for the enormous financial damage their actions caused? (Remember BP? You know…The oil company.) Absolutely not. Well there’s a “settlement” now so maybe? Sort of…
Not one major financial industry executive is in jail. Not one. Not one has been indicted. The federal criminal statute of limitations for criminal activity prior to 2006 is, or shortly will run out for most if not all federal financial crimes committed prior to that date. This is a fact politicians and prosecutors tip-toe around, hoping the American people won’t notice. So far they haven’t. Meanwhile the shredding machines and the incinerators are running 24/7 destroying any documentation that would send the financial elites to jail. No runs. No hits. No errors. No one left on base. Some banks are posting record profits.
What happens now? Why of course the self-same taxpayers who footed the financial bill, are receiving huge, crushing income tax bills from the IRS and the California Franchise Tax Board. Tax bills that are so large, most middle class Americans will never be able to actually repay the tax owed, even over time. No matter how long they live.
By the millions homeowners were systematically robbed with deceptive “neg-am option arm loans” designed to strip the equity in their homes in 3-7 years. These same loans ultimately caused the massive slide in property values and the consequent loss of the homes in foreclosure that is going on to this very minute. Corrupt securitizing and lending practices caused the destruction of many states’ property tax bases, and ultimately knee-capped the national economy. Beleaguered homeowners were victimized by cadres of ex-loan brokers promising to modify their horrendous loans. They were often scammed with phony loan audits promising non-existent legal help. By the hundreds of thousands they are cruelly deceived, toyed with month after month, sometimes for years, before being ultimately discarded by banks pretending to modify their loans.
Now MILLIONS of economically brutalized Americans are staring into a financial lime pit. At the same time as thousands of unscrupulous debt buying companies call former homeowners at all hours of the day and night, the IRS is revving up its form 1099-A and 1099-C levy and lien machine. As the debt buyers threaten Americans who’ve lost or short sold their homes, especially Hispanics non-English speaking Americans, the IRS sends Notices of Proposed Assessment for tens, even hundreds of thousands of dollars in taxes. The IRS is now forcibly collecting taxes for the same cancelled debt the debt buyers are still trying to collect. (Remember the famous video of the water buffalo in Kruger National Park, torn head from hindquarters by a lion and a crocodile at the same time?)
Millions of Americans are getting form 1099-C and 1099-A, Information Returns. These will ripen into tax bills unless the recipient takes deliberate thoughtful action. The resulting tax bills tend to be massive ones. Many times the tax bills purport to show that the former homeowners owe more taxes in one year than many of they actually made that year. Very often these taxes can be completely avoided or tremendously reduced.
The truth is no one actually knows how many of these “taxpayers” actually owe ANY of the money they are now being forced to pay. The IRS’s own form 982 contains at least three exceptions that can wipe out or substantially reduce federal and state income taxes on otherwise taxable relief of indebtedness income tax for former homeowners. There is an exception for debt reduced or forgiven in bankruptcy. There is a separate exception for taxpayers who were insolvent at the time the debt relief occurred. There is still another exception for Qualified Principal Residence Indebtedness.
In California, and some other states, there is a fourth HUGE exception for non-recourse loans. These are in tax parlance “non-recourse loans. The lenders routinely mark these loans as recourse loans on the form 1099 by falsely stating that personal liability exists for the debt in box 5 of the form. They don’t care if the form is correct or not.
Finally, the foreclosure or short sale of a rental property can often result in little or no tax due because of the suspended passive loss rules and an IRS form 4797 ordinary losses on the disposition of the rental property. The problem is the former property owner has to know what they are doing. Step one is the realization that you must affirmatively DO SOMETHING.
Millions of Americans are now totally mentally, physically and financially exhausted. They’ve been stripped of all their savings, their retirement, their homes and their jobs. The stress they have endured is unimaginable unless it has happened to you or someone you care about. They feel humiliated. They have no idea what to do with the 1099-A and/or 1099-C forms they are NOW getting. Tens of thousands of CPA(s) and tax preparers have no idea either. The IRS is not helping.
If you are a former homeowner, don’t keep this secret. Do ask and do tell a competent tax practitioner if you have received from 1099-C or form 1099-A, because the government isn’t telling or helping. The United States Government is in active partnership with the lending institutions that sent out the forms and has been since the bailout started. If possible, get to a solid tax advisor before you let your home go in foreclosure or short sale. This will maximize your options. But even if you cannot do this, more often than not, there is a way to radically reduce or wipe out the tax. However nothing today is automatic with the possible exception of the banks’ automatic perfunctory denial of your loan modification after months and sometimes years, of the homeowner trying to get one. Also, there is now one more certain thing besides death and taxes:
Middle class taxpayers paid to rescue the entire financial industry. They have received virtually nothing in return. They are being forced to pay for everything. Now they are beginning to pay on gigantically inflated and incorrect tax bills. Unless they take action, nothing will stop the process from continuing.
