WT_Foxtrot
Well-Known
Because that was the law back then. The bank was required to send an information return to the IRS attributing the income to him. For a few years after the housing market crashed, until 2007, lots of people got utterly slammed by the law. (As an aside, the IRS Problem Resolution Office folks routinely looked for any meager justification to accept Offers in Compromise that forgave the taxes arising from those situations. The IRS hated collecting those taxes. It was difficult to do the collectng, bad for their public image, and incredibly bad for morale.) In 2007 the law changed and that stopped being income. However, the law was just a temporarely relief measure that lasted 10 years from 2007 to 2017. It has been sunset and defaults are, as of now, again considered taxable income.
Something not quite the same but analogous happens with consumer credit. If you call up your credit card companies and negotiate to pay off all of your $20K in debt for $12K, you'll get 1099C forms totally $8K that must be reported as "Other Income" on your tax return.
Thanks for the teach! Makes more sense now, but doesn't change the fact that like many taxes collected by the feds, it's nothing more than theft, i.e., estate taxes. However in this case, it's taken from people who are in the worst possible position, often not of their own doing, and not only have nothing to pay, but have lost the only asset they had with nothing in return to which they pay taxes on.
Just makes zero sense and can see why it would be bad for morale, even for the IRS.