5405 Home sold at loss, IRS resumes collecting $500

[Cheryl48]

I hope someone has experienced this. My client bought her home in 2008 using the FTHB credit. She repaid $500 in both 2010 and 2011. In 2012 she sold the home for a loss, so the debt was forgiven, 5405 disposition was filed, and $500 was not paid. Her 2013 return was calculated without a 5405 with no problem.

Her 2014 return was done by my associate, since I was out of town. The efiled return was rejected stating that a 5405 was required with $500 repayment. The return was then filed by mail without the 5405, but a $500 payment was withheld from the refund. Client did not let us know that this had happened until two days ago when she came in to have her 2015 tax return completed.

I thought it was just a glitch and told her we would send a copy of the 2012 5405 showing the sale as a response to the letter she received. However, I efiled her 2015 return yesterday and it was rejected due to a "missing" 5405.

Has there been some sort of IRS software revision? Has anyone else encountered this? Is so, how did you handle it? Any suggestions? Thank you in advance.

[rtsietsema]

Confused

The poster is confused?

I believe homes purchased in 2009 were not subject to repayment of the "loan" (not really a credit) from the IRS. Homes from 2008 were subject to repayments, hence really a loan. As long as they lived in the home for 36 months, those purchased in 2009 were truly a credit not subject to repayment. If the house was disposed of prior to 36 months, and a gain was made on the sale, only then would they repay some or all of the credit.

Form 5405 should be filed in the year of disposition. If it shows a loss, no repayment, or further repayments are required.

So why were payments made? And why, if payments were really required in this case, wasn't Form 5405 filed in the year of disposition?

[Lion]

Send in a 2012 Form 5405 with 2012 written in red all over it. It won't make it into the IRS computer system for a long time, so you'll file on paper for 2015. Maybe that will stave off the collection activity until you can make a follow-up phone call. Have another copy handy, because you'll probably end up faxing it in to the person on the phone. If you manage to get someone good, it might get cleared up with that call, and refunds issued. Otherwise, you'll have to amend the returns as changed by the IRS to what they should be (were) to get refunds -- after you know they have registered that the home was sold at a loss in 2012. Try to have your client wait on hold and then conference you in (three-way calling) after she gives permission for the IRS to talk with you.

[Cheryl48]

Send in a 2012 Form 5405 with 2012 written in red all over it. It won't make it into the IRS computer system for a long time, so you'll file on paper for 2015. Maybe that will stave off the collection activity until you can make a follow-up phone call. Have another copy handy, because you'll probably end of faxing it in to the person on the phone. If you manage to get someone good, it might get cleared up with that call, and refunds issued. Otherwise, you'll have to amend the returns as changed by the IRS to what they should be (were) to get refunds -- after you know they have registered that the home was sold at a loss in 2012. Try to have your client wait on hold and then conference you in (three-way calling) after she gives permission for the IRS to talk with you.

Thank you, Lion!
I was hoping for an easy (quick) solution, but I've already got the 2015 ready to mail with the 2012 5405. I'll add the RED... great idea!
C

[Roland Slugg]

Thank you, Lion!

You thanked the wrong person. It was rtsietsema, not Lion, who gave you correct advice.

[Cheryl48]

The poster is confused?

I believe homes purchased in 2009 were not subject to repayment of the "loan" (not really a credit) from the IRS. Homes from 2008 were subject to repayments, hence really a loan. As long as they lived in the home for 36 months, those purchased in 2009 were truly a credit not subject to repayment. If the house was disposed of prior to 36 months, and a gain was made on the sale, only then would they repay some or all of the credit.

Form 5405 should be filed in the year of disposition. If it shows a loss, no repayment, or further repayments are required.

So why were payments made? And why, if payments were really required in this case, wasn't Form 5405 filed in the year of disposition?

Sorry to cause you confusion. Purchase was in 2008. My late evening typing needs help.