False Filng: How Non-Tax-Filers Can Verify a False Return to Prevent Identity Theft

You probably know someone who has been the victim of identity theft. Perhaps YOU have been the victim of identity theft as well. Someone has used my credit card or got a credit card in my name; someone has used my social security number on a tax return.

As a bankruptcy attorney, I have seen the latter quite a lot in the last few years. In both the Chapter 7 liquidation and Chapter 13 consolidation bankruptcy, Debtors are required to give some of their tax refund money to the trustee to disburse to their creditors.

But I have had a few Debtors who were unable to file their taxes (and get their refunds) because taxes have already been filed in their name! Fortunately, both the court and the trustee are sympathetic and do not put them on a deadline while the IRS sorts out the problem.

The Debtors in those cases were lucky – the identity theft was discovered. What if I were on social security, disabled, not employed or otherwise were not required to file a tax return? How can I find out if someone is using my social security number to file tax returns?

This type if scam could go on for years. You would have no idea someone was using your social security number to file tax returns and receive refunds – because you do not HAVE to file! The only time you would discover it is if, for some reason, you decided to file taxes OR the scammers goofed up and the IRS or state department of revenue contacted you about an error or other red flag.

You can check to see if anyone has used your social security number by preparing and filing Form 4506-T Request for Transcript of Tax Return.

Now hold on, you say. How can I request a transcript of a tax return I did not file?

Fill in the top of the form – name, address, social security number, etc. Then check box #7:  Verification of Nonfiling, which is proof from the IRS that you did not file a return for the year. Current year requests are only available after June 15th. There are no availability restrictions on prior year requests. Most requests will be processed within 10 business days.

The IRS will verify that you did not file tax returns. At worst, they will verify there HAS been a tax return filed under your social security number in the past. You will then have to take steps to report the identity theft to the IRS and elsewhere. This blog post does not go into those details, but Google it – there are dozens of places you can seek advice on where to go and what to do next.

Note the June 15^th date – you cannot check to see if someone filed a return under your social security number for 2015 until June 15, 2016. Information on 2014 and prior years are available before that June date.

Identity theft leaves us feeling sick and angry. But in this high-tech society, it is something we have to watch out for; something we have to ardently guard against. This particular type of theft – tax returns filed for people who do not have to file returns – is particularly heinous because it can be left undiscovered for years. Someone is using you to line their pockets with our tax dollars – and this time we didn’t vote for them!

If you are worried about this issue, request verification. Do it every year.

Original Material Copyright 2016 Michael Curry

Read Part one here.

If a Creditor forgives some of the debt you owe it, the IRS considers that amount as additional income for you that year. The Creditor can send you a 1099-C for the amount they wrote off and that is added to your total income. It may be enough to jump you into the next tax bracket – especially if it is a mortgage loan of tens of thousands of dollars.

During the few times clients ask me about debt consolidation, I advise them about the possibility of a 1099-C being sent to the IRS. I also tell them to seek the advice of an accountant or a tax attorney as to any forgiven debt and its tax consequences.  This, plus the fact that SOME debt consolidation companies are scams, are enough to convince them not to abandon the idea.  There ARE plenty of good debt consolidation companies out there, and I recommend a few – particularly Clearpoint – but otherwise caveat emptor (Google it)!

In over 5000 bankruptcies filed, I have had perhaps one percent of my Debtors receive a 1099-C on the forgiven debt. But since they filed for bankruptcy and received a discharge, there IS something they can do about it.

If you filed bankruptcy and received a discharge, and you later receive a 1099-C on the debt from the Creditors, you do not have to worry about it. You still have to DO something about it, but you do not need to WORRY about it.

Simply, a debt discharged in bankruptcy is notforgiven, instead the creditor is required to stop collecting the debt! The debt is still owed, but it is uncollectible, so the creditor might as well write it off on their own taxes and submit it to their insurance.

But they send out a 1099-C to you anyway. Why? Good question, do they get any monetary benefit from it? No, unless it helps keep their bankruptcy insurance premiums down, I suppose. They report it to the IRS and now you have to spend extra time and forms.

How can they send the IRS a 1099-C form on a debt that has not, technically, been forgiven? Another good question. I am not a tax attorney and the tax code is second only to the Harry Potter series in page count. Perhaps somewhere in that former rainforest of volumes, the tax code says that debt discharged in bankruptcy still counts as forgiven debt (although it is excepted). Perhaps it says the opposite; perhaps it does not address it at all (most likely).

Perhaps it may mention what happens when a company sends the IRS an intentionally false 1099-C.  An Attorney General (state or federal) looking to make some bonafides with a non-big-business constituency can look into this if they are looking for some political clout should they ever run for office.

I am sure some attorney, SOMEWHERE, has looked into this…

Regardless, the credit company sent you a 1099-C on a debt you discharged in bankruptcy. You HAVE to claim it on your taxes – the IRS has a copy of the 1099-C as well and will be looking for that income on your returns! What do you do?

When you file your taxes, you should also file a Form 982, labelled Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment).

Fill in your name and social security number, check box 1a and fill in Line 2 with the amount on the 1099-C. Then complete the rest of Form 982 and file it with your taxes.

Don’t do this by yourself! I cannot stress this enough! It’s okay to get the forms free online, but take them to an accountant or a good tax preparer. I have nothing against the people who work in the kiosks in discount department stores or the people who volunteer their time at churches and care facilities who help with taxes. If not for the 1099-C I have no problem recommending you go to them to help you with your taxes. But this is worth paying a little extra. Remember – the IRS is waiting for you to account for the amount on that 1099-C.

Same for credit companies. Some loan companies will help you file your taxes. That’s fine … but they may be the same companies that will send you their own 1099-C in the future.

If you discharged the debt in bankruptcy, a 1099-C is nothing to worry about, although it may cost you extra time and costs when you file your taxes (you can deduct the cost of the tax preparer on next year’s taxes if that is any consolation). A 1099-C is the final thrash at you from a discharged creditor.

Mean? Yes. Petty? Yes. Are you stuck with it? Yes. Can you do something about it? Yes – if it was discharged in bankruptcy.

Original Material Copyright 2016 Michael Curry

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From 1099-C; when forgiving is NOT divine, part one

Bankruptcy clients rarely receive a 1099-C. Only on certain specific debts do I advise a client that after discharging their debt they might get a 1099-C in the mail. Usually mortgages, specifically mortgages with Greentree.

Also, they come in waves every few years. Earlier this year (2016) I had four or five calls from clients about getting a 1099-C. This is the first time I have had to handle calls about it in about five years. I suspect that the person in charge of doling them out at a credit company has moved on and a new person takes over the department trying to make his (or her) bones by inflicting these flimsy pieces of paper on their heretofore loyal customers.

What is a 1099-C form? When a creditor forgives a debt that you owe, it can send a 1099-C to the IRS and that counts as part of your income you must report and on which you must pay taxes.

What?!

Let’s suppose you owe a credit card $11,000.00. Miraculously you have managed to persuade the company to accept $6,000.00 in one lump payment and they write off the rest. They agree and do not renege.  You pay (somehow managing to collect the money – hopefully not as a loan from another credit card company thereby going from the frying pan into another frying pan) and they still do not renege.

(Keep in mind this is a fantasy only used as an example. The odds of a credit card company actually agreeing to something like this and not weaseling out of it even after payment are the same as winning the lottery – so you might as well win the lottery and pay off the card entirely…).

Everyone is now happy. Until you get a letter from the credit card company some months later containing a 1099-C. Now you have to declare that $5,000.00 that was forgiven as income.

Note that you have to declare that $5,000.00 as income whether you get a 1099-C or not!

The logic, that word used loosely, is as follows: now you do not have to pay that $5,000.00. You have five grand you would not have had if the credit card company had not forgiven the debt. That $5,000.00 is income for the year in which it was forgiven.

“But it would have taken me more than five years to pay off that $5,000.00, why does it count for only that one year?” Don’t try to argue around this with reason and sensibleness …

Imagine this family earns $35,000.00 per year. For 2016, their income will be $40,000.00.  If this person is single they are in a new tax bracket – 25% instead of 15%.

The problems come in with real estate mortgages – either modifications or short sales or whatever the latest scheme is from the mortgage companies. In cases like this we are not talking about a “few” thousand, but tens of thousands. Suppose the bank writes off $60,000.00 from the house you just gave back to them. They send you a 1099-C.

Now you go from $35,000.00 to $95,000.00. That a jump up one tax bracket for a married couple, two brackets for a single person!

Here’s an ugly scenario: imagine if the student loan problem is resolved and the government starts forgiving loans. What if THEY start sending out 1099-Cs? You might go from owing the Department of Education $200,000.00 to owing the IRS $100,000.00! And the IRS doesn’t believe in forbearance or deferment! {Note that if a student loan was forgiven because the person who received the loan worked in an underprivileged area as a teacher or a physician (remember that was the original premise for the TV show “Northern Exposure”), that is an exception to this rule.}

Does the credit card or mortgage company benefit from this? No. They do it because 1) they are required to under the tax code, and (more likely) 2) it tickles them.

What can you do? Not much, I’m afraid. You will have to consult an accountant or a tax attorney. You can except the “income” from a 1099-C only in certain circumstances – proving insolvency, if the debt was your home, your business or farm property … things that go beyond this blog and my expertise.

Speak to an accountant or a tax attorney for ways to stave off the extra income.  Tax avoidance versus tax evasion.

Can you file bankruptcy on the debt? No, as there is no debt to discharge. I have had to break this bad news to a few clients in my twenty years of practicing bankruptcy, but not many. And remember – even if the creditor did NOT send you (and the IRS) a 1099-C, it is still your duty to report it as income!

But what if it WAS for a debt that was discharged in bankruptcy?

Ah, that is another story altogether! And a story with a happy ending!

Original Material Copyright 2016 Michael Curry