Independent Foreclosure Review Payment Qualified Settlement Fund

[Howco]

Did anybody have any experience with this during 2014 tax season?

Taxpayer received a large lump-sum payment in 2013 from this settlement fund, related to certain foreclosure proceedings that occured in 2009 and 2010. The settlement fund issued a 1099-Misc, box 3 other income.

Just curious if anybody else came across this. How did you handle the 1099 for tax purposes? The website for the settlement fund indicates they sent information with the payment indicating how they calculated the payment (which would assist in determining how to report it for tax purposes) but of course this taxpayer can't produce the info from the settlement fund.

Any thoughts or ideas are appreciated. Thanks.

[Lion]

Had one client come in with the 1099 and claimed they received no correspondence with the check. I put it on line 21/no SE. If they'd been able to come up with the correspondence, they may or may not have met the requirements for it to be treated another way. But, they were anxious to file and agreed with my treatment after I explained the possibilities.

In their case, it may have been a 4797 to sch D, long term; but they didn't want to pay me to research and they didn't want to research and they wanted the safest reporting....

[mastertaxguy]

national mortgage foreclosure settlement-RR 2014-2.

You may want to look at IRS Rev Rul 2014-2.

The half-dozen or so of these we have seen so far did not result in any gain to the taxpayer . All of these involved individual taxpayers who lost their principle residences in foreclosure without any depreciation for any purpose. Results are different for rental properties and other situations: we just didn't see any of these.

Situations 1 and 4 were the most common we saw.

We reported the payment on line 21, and then adjusted it out on line 36, and attached an explanation statement.

We have amended two returns done by local offices of national chains (one green, one with a statue) each of which had TP's paying ordinary federal, and state, taxes on the payments received. Another one came in April 17 but we sent them back to their independent tax preparer with a copy of the Rev Rul (there were too many other issues with their return).


I could not find where this was the subject of any TTB updates. There was a thread on this issue in January 2012 on this forum under the title "class action settlement." That may or may not be covered by RR 2014-2, or the specific payment may have been "cash for keys."

We may run an ad in our local media outlets soliciting amended return business on this: we suspect there are a couple of hundred of these in our market area.

[AZ-Tax]

Now that is what I call a title of a post

Now that is what I call a title of a post. Very detailed.

[JohnH]

These settlements are somewhat like the payments form a few years back when there was this rush of demutualizations taking place. The general consensus was "no basis", but then there were a couple of tax courts cases with muddied the water a little. In most cases, there was no cost basis and it would have cost about as much as the tax savings to do the detailed research, plus the research may well have yielded a "no basis" conclusion anyhow. After explaining the process to most clients, they would conclude it's better to just report the income with no adjustment.

[Howco]

Thanks. I had reviewed Rev Rul 2014-2, but that pertains to the 'National Mortgage Settlement' (NMS) which is different than the 'Independent Foreclosure Review Payment Qualified Settlement Fund' (QSF). Each program addressed similar issues, but they were separate and distinct in that they involved different time periods, different lenders, and had different bases for calculation/payment of awards.

Research on the NMS suggested that 1099 forms were not issued. Similar research on the QSF indicated that 1099 forms were sent in certain situations, and that information concerning the calculation and taxability of the payment was mailed with the payment. Naturally, my client can't produce this information.

[mastertaxguy]

I disagree. We all have our comfort zones. Reasonable minds may differ.

[JohnH]

If the client can't produce the information, and if he doesn't want to spend the time looking for it or requesting copies, than it seems as though he's content to pay the tax. That's the conclusion I'd come to.

How much was the payment and what's his marginal tax rate? That might be a motivator to get him to do his job. On the other hand, if his only response is "I don't want to pay that much", then he needs a lesson in reality.

[mastertaxguy]

Irs transcripts for 1099 on mort settlement or whatever payments

If the client can't produce the information, and if he doesn't want to spend the time looking for it or requesting copies, than it seems as though he's content to pay the tax. That's the conclusion I'd come to.

How much was the payment and what's his marginal tax rate? That might be a motivator to get him to do his job. On the other hand, if his only response is "I don't want to pay that much", then he needs a lesson in reality.

Excellent point. If TP cannot find the documents, perhaps TP has bank records showing the deposit amount.

Or get an account transcript from IRS for the year in question, plus the year before and year after in case the TP's memory is not exact.

Reminder: if a state or local income tax is involved which would have taxed this payment the savings may add up quickly.

[JohnH]

Clients bring us stuff all the time and they want us to "fix it" for them.
Sometimes that is possible, but at other times there's a lot of research involved to gather the original info.

The client needs to be given the option of doing the research themselves or paying for it to be done.
Estimating the tax liability goes a long way toward helping them make that decision.

If the tax is $250 for example, they don't necessarily want to pay $100 - $200 for research which MAY determine it is non-taxable, but which could also come to the conclusion that yes, it is taxable after all. In that case, the client might decide that they will gather the info. I've seen times in my life when I wouldn't want to spend 2-3 hours on the chance that I might be able avoid a $250 cost, and I've seen other times when I'd be willing to spend all day to try and save $250. Give the client the financial parameters and let them make the decision on next steps. They're already going to have to pay you to prepare the return, so how much more do they want to invest in this?