Foreclosure penalty repayment. 1099MISC?

[Jack from Ohio]

Client received a payment from the lender that foreclosed on his home in 2011 and was one of the lenders required to refund fees. He received $1,300 dollars as his settlement.

The lender sent him a 1099MISC with $1,300 in box 3.

As I understand, this should not be taxable as it is a refund of improper fees or is punitive on the lender. What is the best way to offset this amount, as the IRS will certainly be looking for the amount on the return.

Schedule C and offset with an explanation??

Ideas are welcome....

[ILLMAS]

IRS Issues Tax Ruling on Settlement Payments to Borrowers

Update: 01-22-14

The tax consequences of payments received under the National Mortgage settlement (NMS) depend on the unique facts and circumstances of each individual borrower. The NMS Monitoring Committee proactively sought a ruling from the IRS to provide guidance regarding the taxable status of these payments. IRS Ruling 2014-2 can be viewed here: http://www.irs.gov/pub/irs-drop/rr-14-02.pdf. The Monitoring Committee will not issue any tax forms (including a Form 1099), and your payment will not be reported to the IRS or other tax authorities. However, you should consult with your tax advisor to determine whether the payment is taxable income in your specific situation. The Settlement Administrator and the Attorneys General offices are not able to provide tax advice.

[joanmcq]

This Rev Rul only applies to NMS settlements. I just had a client that received a 1099 for a $3000 settlement payment from another program, but the fact pattern is the same. The borrowers did not have to prove they were actually harmed, and settlement amounts were based on specific classifications. Therefore not taxable?

[kcjenkins]

Not taxable.

[Jack from Ohio]

I agree it should not be taxable. I guess my question is what is the best way to offset it on the return?

[Pacun]

This should go on line 21. I would make the deduction there and leave line 21 with $1. On line 21 I would type "1099misc issued by mistake".

Inside line 21, 1099 issued by mistake $1300, Deduction -1299.

[Gail in Virginia]

I would agree mostly with Pacun. Because the amount is in box 3, I would put it on line 21 rather than a schedule C. I think that even if you deduct the entire $1300 the 1099 and the deduction will go to the IRS computers if you are electronically filing, so I don't see any reason to leave the $1 in income to get the explanation on the front page of the return. Instead I would put the explanation in one of the spaces for other on line 21 with the negative amount.

However, I have not had one of these settlements yet and have not done any research. If this amount is refund of fees charged erroneously or illegally, then whether or not it is taxable might depend on the treatment of the fees originally. If they were deducted from income because they were treated as points, or because this was rental property, they might be taxable now. If they were added to the basis of the original real estate and that has since been sold and income or loss reported on the sale, they might be taxable. If they have been added to basis but the property has not been sold, they would probably just reduce that basis.

Without more information about whether this was the entire amount they received and whether all of the damages were punitive or some were compensatory, I don't have an opinion about taxation of the amounts.

[jklcpa]

I thought the worksheets weren't transmitted with e-filed returns. Is the detail of line 21 different, and the data that is entered there IS transmitted?

[mcb39]

I would agree mostly with Pacun. Because the amount is in box 3, I would put it on line 21 rather than a schedule C. I think that even if you deduct the entire $1300 the 1099 and the deduction will go to the IRS computers if you are electronically filing, so I don't see any reason to leave the $1 in income to get the explanation on the front page of the return. Instead I would put the explanation in one of the spaces for other on line 21 with the negative amount.

However, I have not had one of these settlements yet and have not done any research. If this amount is refund of fees charged erroneously or illegally, then whether or not it is taxable might depend on the treatment of the fees originally. If they were deducted from income because they were treated as points, or because this was rental property, they might be taxable now. If they were added to the basis of the original real estate and that has since been sold and income or loss reported on the sale, they might be taxable. If they have been added to basis but the property has not been sold, they would probably just reduce that basis.

Without more information about whether this was the entire amount they received and whether all of the damages were punitive or some were compensatory, I don't have an opinion about taxation of the amounts.

This is the closest to being correct. I just had a Wells Fargo refund of interest overcharged of approximately $13000. If the interest was used in prior years to itemize deductions, some of it is going to be taxable; otherwise none.

[Pacun]

I agree it should not be taxable. I guess my question is what is the best way to offset it on the return?

I based my answer because the person who knows about the situation said it.

Now, I know that worksheets are not efiled and that's why I left that one dollar on line 21 to make sure that the 1099misc was mentioned on the return.

But I also agree that in some cases it is taxable and it should be reported on line 21... unless the original deduction was made on schedule C. In which case, you should include the 1099misc on schedule C.