Class action settlement

[origun]

Taxpayer received about $1500 in 2010 as a settlement for a "Countrywide Foreclosure Relief Program Settlement Fund." He received a 1099-MISC with the $1500 as "Other Income" in Box 3 (nothing in any other box). The 2010 tax preparer didn't count as income but IRS has contacted taxpayer about unreported income.

I have researched online and found that the taxpayer was in foreclosure when settlement was reached in October 2008. Taxpayer's payment was for "relocation assistance", not a mortgage modification.

THE FAQs of the settlement online say to consult your tax preparer concerning taxability! The taxpayer has no records of any paperwork about the suit or the payment, only vaguely remembers receiving and cashing the check.

I can't see any reason why it isn't taxable. My inclination is that it is Line 21 income not subject to SE. Am I missing something?

Thanks.

[dkss]

I agree with you, I would report on line 21. Perhaps the preparer last year wasn't given the 1099 - I know some of my clients "forget" things. Or when the CP2000 comes in, they suddenly "remember" about the form, but that "they didn't think they had to pay tax on it."

[mastertaxguy]

Did either of you look at IRS Rev Rul 2014-2?

In most cases (perhaps a large majority) these payments are not taxable to the recipients.

There is now a related posting going on.

[dkss]

Crystal ball was broken

Nope.

In 2012 I was unable to research Rev Rul 2014-2!

[mastertaxguy]

Retroactive application of Rev Rule 2014-2

Nothing in the ruling indicates it was prospective only.

If the taxpayer's situation fits the facts set forth in the ruling, and if the TP paid taxes of any kind on the payment, a refund claim/amended return would be in order. Excerpt from the ruling:


(3) Each borrower’s transaction must meet the following requirements for the borrower to receive an NMS Payment:[2]

(i) The borrower’s first-lien mortgage loan was secured by a one-to-four-unit residential property that the borrower had indicated at the time of loan origination was to be used as the borrower’s principal residence;

(ii) The borrower’s mortgage loan was serviced by one of the five bank mortgage servicers;

(iii) The borrower made at least three payments on the first-lien mortgage loan;

(iv) The loan went to foreclosure sale on or after January 1, 2008, and on or before December 31, 2011; and [this is the key time frame-not when they took out the mortgage--mtg]

(v) The unpaid principal balance of the first-lien mortgage loan did not exceed the government sponsored enterprise (GSE) loan limit for the property securing the loan (for example, $729,750 for a one-unit residence).

(4) For each NMS Payment, there must be certification by (or for) the borrower under penalties of perjury that—

(i) The borrower owned and occupied (or intended to own and occupy) the property (or a unit thereof) as his or her principal residence at the time the borrower obtained the mortgage loan;

(ii) The borrower lost the principal residence in foreclosure on or after January 1, 2008, and on or before December 31, 2011; and

(iii) The borrower lost the principal residence in foreclosure because—

(a) The borrower was unable to make payments on the first-lien mortgage loan due to a financial hardship; and/or

(b) The mortgage servicer mishandled the borrower’s application for a loan modification or other foreclosure alternative or pursued foreclosure while the application was pending or after it was approved; and/or

(c) The mortgage servicer, foreclosure trustee, or their attorneys made errors in, or leading up to, the foreclosure process.