Someone I know very well sold a house as it was being foreclosed upon. The sale price of the house nearly equaled what was owed on the mortgage. The predatory mortgage lender who’d been charging sub-prime rates agreed to accept the sale price as payment-in-full for the mortgage. That was 2006.
Now it’s 2008. The seller of the home gets a notice from the IRS asking for several thousand dollars more in taxes for calendar year 2006. The seller only had W-2 income that year, so had filed form 1040-EZ. The IRS says that the seller’s income didn’t match the records on file. What the IRS had on file is a form W-2 . . . AND . . . a form 1099.
The seller never received any 1099. No 1099 ever arrived in the mail. The seller never had any knowledge of the 1099.
The 1099 was sent to the IRS from the mortgage lender. The mortgage lender is telling the IRS that they charged off HALF THE BALANCE OF THE MORTGAGE!!!!!
When creditors charge off bad debts, they are permitted to write it off on their taxes and report the amount written off as income imputed to the debtor. But, in this case, when the sale on the house closed, the mortgage lender acknowledged that the debt was paid in full, and the lender was not taking a loss.
Had the seller received a 1099 in January of 2007, the seller would have taken immediate action to dispute the information appearing on the 1099, and probably could have resolved the issue without needing to consult a lawyer or accountant. The seller is undertaking the dispute now, but is much more inconvenienced as the seller has to dig through papers to gather relevant documentation, and will most likely need to consult with both a lawyer and an accountant, costing perhaps hundreds, but it’s cheaper than paying the thousands that the IRS wants.
What would you think if half the amount of your mortgage were added to your income? Think about the tax bracket it would put you in, and then ask yourself, would you be able to cough up the taxes owed? In the seller’s case, even with the tax bill broken down into monthly installments that the IRS will permit, the 2006 tax payments would become the largest single expenditure in the seller’s monthly budget.
The IRS has notified state and local tax agencies of the income discrepancy, so guess who else will come calling with their hands out?
After looking through the seller’s documentation, I have to wonder, how widespread is this practice of creditors claiming losses that don’t exist simply to reduce their own tax burden?
And while these greedy sub-prime lenders have contributed to bursting the bubble of housing markets which is leaving the nation’s economy teetering on the edge of collapse, this particular sub-prime lender is also back-stabbing the nation by evading payment of their full share of taxes by fraudulently imputing the income to someone else. And even if the debtors pay the tax that’s been deceitfully shifted on to them, the IRS is still getting less, because the lender is probably in a much higher tax bracket than the debtors.
That whole industry sector of predatory lenders are now quaking in fear that legislation being contemplated now will alter their business practices so much that it may not be lucrative enough to keep the doors to their businesses open. My response is: You had your day in the sun. Count your blessings that you were able to get away with what you got away with. Now that it’s raining on your parade, I’m not shedding any tears.
Rev. Wright might say: Your chickens are coming home to roost.
****The sequel with more details****