Recently a client brought in an IRS notice that said she owed $2,834 because of a 2013 form 1099-MISC that showed she had income of $14,805.
It took some extra research but we sent a letter to IRS that said she owed nothing because the form was issued in error.
It all related to a payment she received from RBS Nevada AGO Settlement. The Nevada Attorney General Office explained that none of the payment was for punitive damages. The tax law says punitive damages are taxable income. So she had no income for that item.
There was an Oct. 22, 2012, settlement agreement called “Assurance of Discontinuance” wherein RBS Financial Products, Inc. agreed to pay $42.5 million to a fund to reimburse homeowners for the potential misrepresentations of what the adjustable rate mortgage really meant.
IRS publication 4345 says, “ ... whether you must include the settlement proceeds in your income depends on all the facts and circumstances in your case ...” It also says, “... property settlements for loss in value of property that are less than the adjusted basis (cost) of your property are not taxable and do not need to be reported on your tax return ...” However, you must reduce your basis (cost) in the property by the amount of the settlement.
That is not so bad since most sales of principal personal residences owned and occupied for at least two of the five years before sale qualify for special exclusion of gain amounts.
The Nevada Attorney General Office then helped us by providing a copy of a memo by the Office of Chief Counsel of IRS that addressed payments to settle allegations of unfair lending practices. It said, “... settlement has the effect of equitably reforming the loans . ..are not gross income to Borrowers under section 61 of the (tax code) ...”
This means the form 1099-MISC that showed additional taxable income was sent by mistake by the administrator of the fund and should not have been sent. It is easy to understand how the administrator did not realize the correct tax treatment since the tax laws are too complicated.
But if you know of someone that got a payment from that fund and then paid additional income tax due to the form 1099-MISC, maybe they should consider filing an amended return for a refund? Since 2013 returns would normally file by April 15, 2014, the usual three-year statue of limitations won’t expire until April 15, 2017, or so.
IRS received the erroneous form 1099-MISC and sent notices out to the taxpayers. It is a shame the administrator of the fund did not get good tax advice and made a mistake by sending out the forms. It just shows not all forms 1099-MISC are correct.
Did you hear? “I’ve learned that you should not go through life with a catcher’s mitt on both hands. You need to be able to throw something back.” — Maya Angelou
John Bullis is a certified public accountant, personal financial specialist and certified senior adviser who has served Carson City for 45 years.
He is founder emeritus of Bullis and Company CPAs.