Cancellation of Debt

[Gail in Virginia]

Potential client coming in this morning with an unusual situation. I don't have all of the details yet because we have not met, but as I understand the situation, he finished paying for his mortgage last year. However, the current holder of his mortgage (it had been sold several times) claimed that he still owed $18,000 on the mortgage. Client got a lawyer, and thought everything was straightened out. Until, that is, he received a 1099C for the cancellation of the debt.

Of course, he doesn't feel like he should have to pay taxes on this amount because he thinks that the debt was paid in full not cancelled. I don't know what the lawyer did or agreed to, or what paperwork the client has signed in dealing with this matter. BUT if he really did pay the mortgage, and did not ever agree that he still owed this amount, how do we contest the bank's issuance of the 1099C?

My personal feeling is that he needs to go back to the lawyer, not to me, but does anyone have any experience that is similar?

[Doug TRX Alliance]

Gail I agree he needs to go back to his attorney, however he can rebut this through IRS in writing and this may be the best way since the mortgage company would have to prove to the IRS it is valid.

Doug Hughes

[JohnH]

I'd tell the client he needs to get all documentation from the lawyer and bring it to me. Chances are, the tax side of this won't be solvable by anyone other than a tax pro, regardless of what the lawyer did. Fees for reviewing everything and preparing IRS correspondence could be pretty high, but certianly less than the tax on $18K.

[jainen]

>>he needs to go back to his attorney<<

Assuming he is correct about paying off the mortgage (which of course we can NOT assume), he may not want to go back to the same attorney who botched the deal. A wild guess is that he has lousy records so the best the lawyer could do was browbeat the lender into giving up. Anyway, this is a tax matter now, so the client needs a tax professional. Be sure to disclose 1099 non-conformity with Form 8275 so that, in case you lose, he doesn't get substantial underpayment penalty and you don't get preparer penalty.

>>the mortgage company would have to prove to the IRS it is valid<<

Interesting concept. But no, the mortgage company doesn't have to do anything. The burden of proof is on your client. (If you are VERY careful and thorough you can switch the burden of proof on to the IRS when you go to Tax Court.)

[Max W]

Is there any problem with using form 982 to discharge principle residence debt?

Going back to the attorney or the mortgage company or writing letters to the IRS will be a waste of time.

The $18K could have been a write down that the client wasn't aware of, or doesn't remember. Besides, he only 'thinks' that it was paid off.

Does he have the records to prove it.

[Randall]

Not an answer to the specific topic, but people just don't keep their records. They think they don't need this and don't need that. I keep reminding people but they still don't listen. Mortgage and loan statements, original debt documents, correspondence, mutual fund statements. On and on. Mail that comes in just seems to disappear. Then they say they never got anything.

[mcb39]

I have had more people calling this year to ask how long they needed to keep papers. I would like to say "forever", but I do say "forever" in regard to stocks, RE transactions, Retirement funds, any type of business and/or rental info. Why is everyone in such a big hurry to throw things away? I have a gal coming in on Monday who hasn't filed for five years.; which was the last time I filed for her. I thought she went elsewhere. No, she just didn't file. I hope she didn't throw anything away for her sake.

[Jack from Ohio]

Important documents from banks and other institutions can be reprinted. Not having a doucment from an institution or organization is not an excuse.

[JohnH]

I have had more people calling this year to ask how long they needed to keep papers. I would like to say &quot;forever&quot;, but I do say &quot;forever&quot; in regard to stocks, RE transactions, Retirement funds, any type of business and/or rental info. Why is everyone in such a big hurry to throw things away? I have a gal coming in on Monday who hasn't filed for five years.; which was the last time I filed for her. I thought she went elsewhere. No, she just didn't file. I hope she didn't throw anything away for her sake.

Everybody's intent on going paperless. They don't give much thought to things such as per-digital recordkeeping, bank mergers, snd basic sloppiness in the businesses they deal with. They just assume somebody else has it taken care of, or perhaps they will be able to bully, beg, belittle, or shame somebody else into covering for them if a problem comes up.

[taxtrio]

Paperless is an interesting concept... Sound good; but things to consider are.....

Backing-up your files is crucial... I receive a lot of offers to "back-up on the cloud" as they say.

But questions that need to be asked : Where is the "cloud"? What country is it in? What are my legal rights if the company closes? What then?

What's your take on the cloud?

taxtrio

[Jack from Ohio]

Clouds are nice to look at, bring rain and protect from the sun. Other than that, in my opinion, there is no use for them.