1099 Tax Software Blog

Individuals or business entities who borrow money from a lender whether it be a lending institution for the purchase of a property may be required by the lending entity to secure the loan by the property being purchased. Should an individual then go ahead to transfer an interest in the secured property to the lending entity as the case would be in a foreclosure, or should an individual abandon the property, he or she may be required to treat the transfer or the abandonment as an actual sale of the property in question. Should the lending entity acquire an interest in the secured property or have a reason to know that you abandoned the property, the lending entity is required to send you a Form 1099-A for the acquisition or the abandonment of a secured property.

When an individual borrows money, he or she is not required to include the proceeds of the loan in gross income. This is because the borrower has an inherent obligation to repay the lender at a later date. Should that obligation be cancelled, the borrower is required to include this cancelled debt in gross income. When a commercial lender cancels a debt, the lending body will disburse a Form1099-C with regard to the cancellation of debt. This is the official method of reporting the debt cancellation.

The form 1099-A reports the principal amount owed to the lender as well as the fair market value of the property secured. This is then used by the debtor in determining whether there is a gain or loss in the property disposition. The form 1099-C reports the cancelled debt by the lender. The Form 1099-C may be used singly, if the interest of the lender in the secured debt or the abandonment of the property by the debtor as well as the cancellation of the debt all happen within the same calendar year. Should the borrower receive Form 1099-C or Form 1099-A with incorrect information, one should contact the lender in order for him to make the necessary corrections. Failure to do this could lead to penalties being imposed on your for providing the incorrect information or you could end up being short changed in the long run.

There are some circumstances that may call for the cancellation of debt income wholly or partially.  One such case is whereby you have a debt income cancellation on ones principal residence. Here one may be allowed to exclude the whole amount or part of the amount that is cancelled from your income. This is provided for expressly in the Mortgage Forgiveness Debt Relief Act of 2007.

Mortgage companies, bond issuers and other lenders sometimes must deal with deadbeat borrowers and abandoned properties. The mortgage crisis of 2007-08 caused many homeowners to lose their homes, a condition that is only slowly getting better. For mortgage lenders and those who make secured loans, times have been tough and have led to the assumption of properties that served as collateral. When this occurs, lenders must send copies of Form 1099-A, Acquisition or Abandonment of Secured Property, to the IRS and to the borrower.

Secured Property

The property covered by Form 1099-A is any real, tangible or intangible property that served to secure a loan. A couple of exceptions don’t require filing of the form:

1)    Property is located outside of the United States and the borrower is an exempt foreign person.

2)    The property is tangible personal property, such as a car, that the borrower didn’t use for business or as an investment.

Sometimes, multiple owners — investment pools, trusts, government units, subsequent holders, etc. — share a loan. In this case, a responsible person, such as a trustee or owner of record, files Form 1099-A on behalf of all the co-lenders.

Do not confuse multiple owners of a single loan with multiple lenders that have extended different loans secured by the same property. For example, if a company mortgages a factory to three different lenders and then defaults on a payment, one or more of the lenders may foreclose on the property. If this happens, all the lenders must file Form 1099-A, because the value of their claims on the collateral is reduced.

Abandoned and Acquired Property

Some borrowers simply walk away from the property they’ve used to secure a loan on which they can no longer make the payments. This is abandoned property and lenders must file Form 1099-A if they become aware of the fact. The IRS expects you to know, or have reason to know, when a borrower abandons a secured property, if the information was available through a reasonable inquiry. The reporting requirement arises no later than three months after learning of the abandonment or upon foreclosing on or selling the property.

Acquisition occurs at the earlier of the date you took title or the date upon which you received the burdens and benefits of ownership. Sometimes, the borrower may object, and if there is an objection period, your acquisition dates from the end of that period. If you buy a secured property sold to satisfy a debt, the acquisition date is the date of sale or the date the borrower’s right to redeem the debt expires, whichever occurs later.

Filling Out Form 1099-A

Here is the information the lender must provide when filling out Form 1099-A:

• Identifying information of lender and borrower, including federal identification numbers
• Account number
• Date of lender’s acquisition or knowledge of abandonment
• Balance of principal outstanding, not including accrued interest or foreclosure costs
• The property’s fair market value, which can be the gross foreclosure bid price or the appraised value
• An indication whether the borrower was personally liable for repaying the debt
• Property description, include the address of real property, the section, lot and block if necessary, or the type, make and model of personal property such as a car, office equipment or abandoned crops that secure a Commodity Credit Corporation loan.

Filing Rules

You must accompany Form 1099-A with a copy of Form 1096, Annual Summary and Transmittal of U.S. Information. If you forgive all or part of the loan, file Form 1099-C, Cancellation of Debt, instead of filing Form 1099-A. File paper copies with the IRS by the end of February and electronic copies by the end of March. File a copy with the borrower by the end of January. To save time and resources, you can use a provider of mail house solutions to print, fold, stuff and mail your returns. If you are a bank or financial institution with many copies of Form 1099-A to complete, consider buying 1099-A software that allows you to enter the information and then create the file, which you can print off or transmit electronically. You can also hire a service provider to take all the work off your hands. The IRS assesses penalties for failure to file Form 1099-A, up to $1.5 million per tax year.

RS Form 1099-A is used to report Acquistion or Abandonment of Secured Property.

Form 1099-A has 3-pages of forms that are held together by a perforated edge. The first page is Copy A and that is sent to the IRS.  Copy B is sent to the borrower and Copy C is retained by the lender. You can detach Copy A from the rest of the forms and print just the data on top of Copy A and print.  If you are filing electronically, you are exempt from using the red-ink forms.  Copy B and Copy C can be printed on plain paper with black ink.  Both Copy B and C do not need to be in the same layout as the IRS form.  The boxes can be moved around or arranged differently on the form; what is important is that all of the information is shown on the form and transmitted to the borrower.

The top part of the form shows the lender name, address, phone and TIN followed by the borrower name, address and TIN.  The account number is also displayed.

Then there are 6 boxes of information.  Box 3 is shaded and nothing is expected for that box. The other boxes are discussed below:

Box 1. Shows the date the lender’s acquired or had knowledge of abandonment.

Box 2. Shows the balance of principal outstanding.

Box 4. Shows the fair market value of the property.

Box 5 is checked if the borrower was personally liable for repayment of the debt.

Box 6. Shows the description of property.

In 2008, there were many fraudelent filings of the 1099-A and 1099-OID.  We met with the IRS several times and the IRS we met with said that individuals should never file IRS Form 1099-A and instead only banks or financial institutions.  We agreed that we would sell the 1099-A software to Banks or Financial Institutions that provide:

1. The name of the bank and/or financial institution.
2. A valid FDIC number and/or ABA routing number of that bank and/or financial institution.

Furthermore, after ordering, we will only provide a passcode to register the software only to an employee from that bank that purchased the software.  We will e-mail an employee of that bank or financial or call them and provide a passcode. These two conditions prevent us from selling the software to individuals, which is what the IRS wants.