28 November 2019Accounting & tax analysis

IRS confirms CFSIC payments not considered income

The Internal Revenue Service (IRS) has confirmed that the Connecticut Foundation Solutions Indemnity Company (CFSIC) is not required to issue federal tax form 1099s, used to declare miscellaneous income, to homeowners it has assisted in repairing their crumbling foundations.

On August 28 CFSIC, the captive insurer created to coordinate assistance claims from homeowners and distribute mostly funds to repair crumbling foundations, wrote a letter to a delegation of four Congressional members, seeking guidance on its IRS obligations.

Congressional representatives Joe Courtney and John Larson, and Senators Richard Blumenthal and Chris Murphy in turn sought clarification from the IRS on whether CFSIC must issue Form 1099s to homeowners it had assisted.

A letter back from the IRS confirmed that, because CFSIC does not collect information that would allow it to determine a homeowner’s basis in their property, it is not required to provide homeowners with a 1099 form.

According to the IRS, “a payor is not required to file or furnish a Form 1099 if the payor does not have a basis to determine the amount of a payment that the recipient should include in gross income.”

Basis in property is a calculation that typically means the cost of the asset to the buyer, and may include settlement fees, closing costs, the cash paid for the property, and the mortgage on the property.

The letter added that “reimbursement for a casualty loss that a taxpayer does not deduct is generally not income to the taxpayer if the reimbursement does not exceed the taxpayer’s basis in the property.”

The letter said those who have received reimbursement from CFSIC could be required to report these funds on their federal tax return in some specific instances: if a homeowner had previously claimed the federal casualty loss tax deduction, and later receives reimbursement for those previously claimed losses; of if a homeowner receives reimbursement that exceeds their basis in the property.  In that case homeowners must include the excess amount in income, the IRS said.

However, the delegation advised “all homeowners...to consult closely with their financial and tax professionals to fully understand how [CFSIC] assistance could impact their taxes.”