Cash-for-Keys Program

[Mike Mac]

I just finished up working on a CP-2000 Notice for one of my younger single clients. The IRS wanted to add $2,000 of self employment income, along with the associated SE taxes to his 2009 return due to a 1099-Misc that was not reported on the return (nor given to me at tax time). First of all my client could not remember what it was for and thought perhaps he did some type of side job for cash that he did not report. I thought an even $2,000 was strange so I kept pressing him to recall if it could have been something else. It was the same year he had lost his house and we had to deal with a 1099-A and 1099-C.

He then mentioned something about a Keys-for-Cash or Cash-for-Keys program. I googled it and found out it was a program to incent the owner to move out of the home earlier than normally required and not trash the home as you leave. I had not heard of the program before and thought I'd share in case others of you might run across this in the future.

So...It was still income but I'm reporting it on line 21 of the 1040, not subject to SE.

[JG EA]

I'm curious as to how you handled this since you did not agree but needed to change the return. Did you handle in writing this on the CP they issued? Or did you call and talk to the number on the CP notice? Or did you call the TPH?

[Gary2]

If I were doing this on the original return, I agree that it would go on line 21, not subject to SE, with a note of explanation (which probably won't head off a CP2000 for the SE, but would facilitate responding to this).

In this case, I would first confirm that it really is Cash for Keys, using the issuer information on the CP2000. If that pans out, I'd ask the payer to issue a corrected version putting the amount into box 3, expecting that they'll refuse.

Then my personal preference would be to call the number on the notice, explain the situation and that you agree with the income tax but not the SE tax. Depending on who handles it, they may accept that verbally, ask for a written explanation, or ask for more proof. Worst case, you'd have to go back to the payer for a copy of the Cash for Keys contract. (Really worst case, they won't give it to you.)

[FEDUKE404]

What did you do?

That nasty little Sch SE once again rears its ugly head....

(I guess the client just did not keep track of the Form 1099-MISC? How was the income shown on said document??)

I assume you do/did agree the $2k does constitute taxable income?

And, FWIW, I had never heard of this program either.

FE

[Mike Mac]

How handled

I've handled these disagreements over CP-2000's the same over the years and it has worked so I've stuck to the same process.

What I did is to annotate the correct amounts right on one of the pages of the CP-2000 (the one that gives the breakdown of differences as IRS sees it) but also include a corrected copy of the 1040 and any other forms that would have be different due to the change in numbers.

I do this because in 99% of the cases I have to prepare an amended state return anyhow and all the MN tax numbers flow from the 1040 data sets. In MN, if IRS gives you a valid notification that will change your federal return, if you don't automatically fix your state return, the client is subject to penalties.

Mac

[JohnH]

That nasty little Sch SE once again rears its ugly head....

(I guess the client just did not keep track of the Form 1099-MISC? How was the income shown on said document??)

I assume you do/did agree the $2k does constitute taxable income?

And, FWIW, I had never heard of this program either.

FE

Here's some explanatory info on the "program":

http://homebuying.about.com/od/foreclosures/qt/072908_cashkeys.htm

[joanmcq]

I have seen the IRS send out a CP notice suggesting SE tax 'might' be due even if the 1099-MIsc does have the income in box 3, even if reported on the return. Since in your case the income wasn't reported, the CP notice is a given.

I agree with Mike & Gary; first try to determine from the CP notice who issued the 1099, and what box the income was reported in. If it is indeed a cash for keys and it's being reported as nonemployee comp, send in the explaination with proof that it should be other income and not SE. Then I also send in a copy of the recomputed 1040 stamped 'worksheet'.

Having the proforma done does allow the state return to be easily amended, as well as to check the IRS's numbers.

[taxea]

I have a client in CA who walked away from a house that was under water (the mortgage) and she never got anything from anyone in the way of 1099's or forclosure notices.

[David1980]

I have a client in CA who walked away from a house that was under water (the mortgage) and she never got anything from anyone in the way of 1099's or forclosure notices.

Maybe they sent the 1099's to the last known address (of the house that was foreclosed?)

[Gary2]

I have a client in CA who walked away from a house that was under water (the mortgage) and she never got anything from anyone in the way of 1099's or forclosure notices.

In addition to David's comment about them sending them to the wrong address, there's also the issue of how long it takes for the mortgage holder to decide that the property has been abandoned - assuming the client literally moved out without notifying the mortgage holder. I'm not familiar with CA law or processes, other than knowing that it's likely to be non-recourse. So I can imagine it could take several months, conceivably over a year before the mortgage holder issues the 1099-A.

Assuming that it really is non-recourse, and likely to be treated as a personal loss, there probably aren't any tax consequences for the client.

[taxea]

client notified mortgage holder and gave them new address. This occurred when the new laws were enacted re these issues. Bank told her to walk away and there would be no consequences.

[joanmcq]

If it was the original purchase mortgage in Ca, then the most they should get is a 1099-A. I actually had one where the lender got it right, 1099-A indicated non-recourse, and no 1099-C was issued.

But then again, this was a local CA bank rather than one of the big ones.

[taxea]

yes it was CA and not even a 1099a was issued.

[joanmcq]

you might want to verify through eservices, but if the notice didn't address that, it's doubtful it was issued. The Misc should be box 3 as indicated earlier; they did get something; money to move and it is thus taxable. But not SE.

[taxea]

client got nothing...she turned in the keys and walked away.
Checking with e=-services...thanks I had'nt thought of that...I will get POA from her. Better safe than sorry even if just to report a zeroed out form