Bottom line: No additional tax liability.
In 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 consumer getting shafted by the mortgage industry. The consumer had sold a house in 2006 with the assurance from realtors on both ends of the transaction that the sale price ($129,000) of the house would satisfy the mortgage in full. The original mortgage amount was $133,000, and the principal had been paid down a few thousand dollars over the course of a couple of years before the loan lapsed into default. After the sale supposedly tied up all the loose ends, the remainder of 2006 came and went. 2007 came and went. Then in 2008, from out of the blue, the IRS wants back taxes from the seller. The IRS said that a large mortgage debt was written off in 2006, and that the debt write-off had to be imputed as income to the seller. With additional income being imputed to the seller for the 2006 tax year, thousands of dollars in back taxes were being sought by the IRS.
Now for the update:
The seller did not have an easy time of trying to communicate with the IRS to dispute the matter. Contacting the IRS requires navigation through lots of automated systems, particularly by way of phone and the internet. Menu options weren’t adequate for addressing the dispute in a speedy fashion.
Ultimately, the decisive document that saved the day came from the Lorain County Recorder’s office. “Satisfaction of Mortgage” was the heading emblazoned across the top edge of the document. Within the document was a signature from a corporate executive officer of Lytton Loan Servicing, a subsidiary of JP Morgan Chase, stating that the proceeds from the sale of the property satisfied the mortgage in full. This was the proof that there was no mortgage debt written off. With no write-off, there’s no additional income to be imputed to the seller, thus no additional tax liability.
Despite the slam-dunk nature of the document in settling the dispute, the IRS mulled over the matter for awhile before finally rendering their decision that the 1099 form they’d received from Lytton Loan Servicing was an error (or was it Lytton’s deliberate attempt to evade taxes?). Isn’t it amazing that something so simple and straightforward can take 15 months, from May 2008 to August 2009, to resolve?
Now one has to wonder if Lytton Loan Servicing and its parent company, JP Morgan Chase, will have to cough up back taxes to the IRS for income that they had initially written off. Then again, JP Morgan Chase received a federal bailout, so I suppose they receive tax money instead of paying tax money. Zero accountability.