There are many different types of IRS Form 1099 that a financial institution is required to report each year. Based on my past experiences, it seems that financial institutions have the most questions with respect to the Form 1099-A (Acquisition or Abandonment of Secured Property).
A financial institution must file a Form 1099-A whenever it forecloses on real property that was held for personal or business purposes, or it forecloses on personal property that was held for business purposes or for investment. Generally, this means that the financial institution must file a Form 1099-A if it forecloses on a consumer’s residence (i.e., real property), but the financial institution will not file a Form 1099-A if it forecloses on a consumer’s car (i.e., personal property). However, the financial institution must file a Form 1099-A if it forecloses on any real property or personal property that the consumer or business customer used for business purposes or for investment.
The deadlines for filing Form 1099-A are as follows: Copy B of the Form 1099-A must be furnished to the financial institution’s customer by January 31, and Copy A must be filed with the IRS by February 28 (March 31 if you file electronically).
The Form 1099-A informs the customer that the customer may be required to report income due to the foreclosure. Income to the customer is measured by the difference between the customer’s adjusted basis in the property and the fair market value of the property sold at the foreclosure sale (i.e., the bid price). Although it may seem harsh for the customer to be required to recognize income (and pay income tax) when his property has been foreclosed on, that’s the IRS rule. The good news is that the financial institution has no responsibility for determining whether the customer is required to report income. The financial institution’s only responsibility is to file the Form 1099-A. Then, it is up to the customer to determine whether the customer is required to report income due to the foreclosure.
Many financial institutions don’t realize that they are required to file a Form 1099-A even if they aren’t the creditor foreclosing. For example, let’s say that the financial institution holds a second lien on the customer’s home. The first lien holder conducts a foreclosure sale which wipes off the financial institution’s second lien on the home. The second lien holder didn’t receive any money from the foreclosure sale because all of the foreclosure proceeds were used to pay the first lien holder. The IRS still requires both the first lien holder and the second lien holder to file a Form 1099-A.
The rules with respect to Form 1099-A can be tricky, but hopefully this article has provided some guidance for your financial institution.