FTHB credit, house foreclosed in 2011 still paying it back!

[cjlcpa]

OH MY! A new client came in yesterday to file her 2014, through discussion I discovered that the home that she and her ex received the FTHB credit on was foreclosed in 2011. They were married then, ex was using Turbo Tax and of course had no clue that the credit does not have to be repaid if there is a loss. Joint filings until 2013, each year paying the $500. Continued to pay it back on separate filings 2013 and probably 2014 for her ex.

What to do? 2011 is closed so can't do 1040X to correct for the year of foreclosure. Suggestions on how to deal with this would be greatly appreciated. My client is not very concerned about getting back the overpaid money but does not want to keep paying it now that she knows!

Thanks for your time.

[David1980]

You could still do a 1040x for 2011, you just won't receive a refund from that year. (Assuming no extensions etc...)

[cjlcpa]

You could still do a 1040x for 2011, you just won't receive a refund from that year. (Assuming no extensions etc...)

I didn't realize they would accept an amended return on a closed year. Another new client recently brought in a 1040X prepared by another CPA for 2011 in which he owed money. IRS would not accept the changes and returned his check to him! Have you had success in the past filing an amendment for a closed year?

[AZUKHiker]

IRS Is Correct

I didn't realize they would accept an amended return on a closed year. Another new client recently brought in a 1040X prepared by another CPA for 2011 in which he owed money. IRS would not accept the changes and returned his check to him! Have you had success in the past filing an amendment for a closed year?

There is no legal obligation to file amended returns and equally the IRS is not obligated to accept an amended return. Hence any amended return filed outside the SOL is likely to be rejected by the IRS and the check paid back as you discovered.

[David1980]

There is no legal obligation to file amended returns and equally the IRS is not obligated to accept an amended return. Hence any amended return filed outside the SOL is likely to be rejected by the IRS and the check paid back as you discovered.

But in this situation, they need to report the disposition of the home that they received a FTHBC on. The house was disposed of in 2011. Obviously there is a way for the taxpayer to fix the error in not including the 5405 on the 2011 return - they don't have to continue making the annual repayments just because they failed to file the 5405 before the 3 years were up.

I don't believe an amended return in this case would be "rejected". Yes, any refund wouldn't be paid and if they owed and sent money I might expect that to be returned, but I'd still expect them to process the 5405 and update the repayment information in their database. That's the route I would go - file an amended 2011 return to report the disposition of the home and amend 2012, 2013, 2014 if they filed all of those years and included a repayment.

Will it go perfectly smoothly? Hopefully, but if not the correspondence from the IRS would give me an another avenue. For example if they don't accepted the amended 12/13/14 returns because they still think there's a repayment that gives another avenue to send in the 5405 for 2011.

[David1980]

IRM 21.6.4.4.18.4 has an example that is pretty dang close to this fact pattern.

It's item 10 under 21.6.4.4.18.4.



Dispositions reported after the statute expired for the tax year are allowable. Follow normal statute procedures when considering tax adjustments and refunds.
Example:

A disposition reported in July 2014 showing the home was sold for a loss in 2010 - the taxpayer is not liable for any annual installments beginning in 2010. Tax year 2010 can be updated to reflect the disposition, however, since the statute for 2010 is expired, no tax adjustment or refund is allowed on 2010. Repayments on tax years 2011, 2012 and 2013 can be refunded.
Note:

Ensure CC IMFOLF is updated to reflect the total credit amount as recaptured. However, if the taxpayer has unfiled returns, the recapture amount required to be reported on those returns should not be reflected in the disposition amount.


The only difference is 2010 vs. 2011 and 2014 vs. 2015.

[cjlcpa]

IRM 21.6.4.4.18.4 has an example that is pretty dang close to this fact pattern.

It's item 10 under 21.6.4.4.18.4.



Dispositions reported after the statute expired for the tax year are allowable. Follow normal statute procedures when considering tax adjustments and refunds.
Example:

A disposition reported in July 2014 showing the home was sold for a loss in 2010 - the taxpayer is not liable for any annual installments beginning in 2010. Tax year 2010 can be updated to reflect the disposition, however, since the statute for 2010 is expired, no tax adjustment or refund is allowed on 2010. Repayments on tax years 2011, 2012 and 2013 can be refunded.
Note:

Ensure CC IMFOLF is updated to reflect the total credit amount as recaptured. However, if the taxpayer has unfiled returns, the recapture amount required to be reported on those returns should not be reflected in the disposition amount.


The only difference is 2010 vs. 2011 and 2014 vs. 2015.

David, thank you very much! I will go that route and hope for smooth sailing.

Carrie