Sub-prime lender as tax evader

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****

11 Responses to “Sub-prime lender as tax evader”

  1. Tim Ramsey Says:

    I recently came accross your blog and have been reading along. I thought I would leave my first comment. I dont know what to say except that I have enjoyed reading. Nice blog.

    Tim Ramsey

  2. buckeyerino Says:

    Thanks for stopping by. Opinions, whether positive, negative, or otherwise (as long as they contain no obscene expletives) are always welcome here.

  3. Mike Harmon Says:

    I came across your blog on Technorati. Nice site layout. I will stop by and read more soon.

    Mike Harmon

  4. thatwoman Says:

    OMG – DJW I can’t begin to imagine, I know what a burden having the county and the the CRA taxes added to a mortgage payment has given people ( new builds) who budgeted for a mortgage payment and then found out it will be substantially more and they also are having the added burden of attorneys but I am gobsmacked to think that your income could be effected and tax bills I am going to link this article to my site as I think people need to be aware .thanks for this Loraine

  5. buckeyerino Says:

    Loraine, I hadn’t mentioned this because it doesn’t pertain to this seller, but on Dec. 20, 2007, President George W. Bush announced the signing of the The Mortgage Forgiveness Debt Relief Act of 2007, which prevents a seller of a primary residence of a home worth less than 2,000,000 from having to pay taxes for the amount of the mortgage forgiving by the lender because the sale of the property didn’t provide enough funds to pay the mortgage in full.

    Unfortunately, this episode predates The Mortgage Forgiveness Debt Relief Act of 2007. The seller right now is scrambling to gather the information that shows the difference between the sale price and what was owed on the mortgage was not different, or if different, it was only by a very small amount. This predatory lender inflated the write-off amount many times over.

    While those currently facing a short sale on their primary residence won’t have to pay these taxes, the lenders could still be cooking the books and writing off far more than the money they lost in reality, and my headline reflects that. I just wonder what investigative tools the IRS is using to investigate these unscrupulous businesses.

  6. thatwoman Says:

    thanks for the clarification I have added it to my blog but still this is unacceptable I would think your seller isn’t alone in this ….I can’t imagine losing your home, and then having this insult added to injury……after dealing with what I am dealing with today and in the past few months I have realized people have become faceless to TPTB we are just a number…..let me know how this works out…… Loraine

  7. Ladalang Says:

    Amazing how the bankers always have a way out and citizens are on the hook for their underhanded dealings. The home was probably lost in the first place because of a predatory loan but they just keep coming up smelling like roses. This is the reason the Federal Reserve needs to be ended and we print our own money. They have a choke hold on America and they won’t stop until we are broke and homeless.

  8. Defrauding homeowners AND the IRS « Buckeye RINO Says:

    […] Sub-prime lender as tax evader […]

  9. HOPE ON Part 10: Obama will tax us « Buckeye RINO Says:

    […] the talking points many times over.  I have, however, said a few things about taxes relative to ethically challenged sub-prime lenders playing shell games in order to avoid paying taxes.  I’ve also made some down-ticket […]

  10. IRS dispute resolved « Buckeye RINO Says:

    […] May 2008, I wrote 2 blog entries, “Subprime lender as tax evader,” and “Defrauding homeowners AND the IRS,” which comprised a case study of a […]


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