Thomson Reuters Tax & Accounting News

Featuring content from Checkpoint

Back to Thomson Reuters Tax & Accounting News

Subscribe below to the Checkpoint Daily Newsstand Email Newsletter

BofA fights class action over tax reporting of mortgage interest

(Reuters) – Bank of America has asked a federal judge to dismiss a nationwide class action accusing it of misreporting mortgage interest on tax forms, arguing that U.S. tax authorities, not the courts, should decide how the interest must be reported.

In a brief on Wednesday in a California federal court, lawyers for the bank said that if courts start interfering in the reporting issue, the Internal Revenue Service will lose the national uniformity it needs to administer the tax code.

“Only the IRS, not Bank of America, issues tax refunds and thus can give plaintiffs the relief they seek, which is a mortgage interest deduction and ultimately a tax refund,” the lawyers said.

The bank is represented by Skadden, Arps, Slate, Meagher & Flom.

At issue is a lawsuit filed in August accusing the bank of under-reporting mortgage interest that homeowners can claim as a deduction for their income taxes. Federal law requires lenders to report mortgage interest to the IRS each year on 1098 forms.

Mortgage interest is typically a homeowner’s biggest deduction and can be worth thousands of dollars in tax savings, the lawsuit said.

The deductions were lost because of the way the bank accounted for past-due interest when it modified mortgage loans for homeowners who fell behind on their payments, the lawsuit said.

The unpaid interest became part of a new loan balance, and the bank essentially counted it as principal, not interest, for IRS reporting purposes, the lawsuit said.

Plaintiffs had argued that the bank did not report the interest so that it could reduce its own interest income and taxes, an accusation that lawyers for the bank called “baseless.”

A spokesman for the bank declined comment.

In Wednesday’s brief, lawyers for the bank said plaintiffs are seeking to “deputize” Bank of America as their tax preparer. No statute or rule requires lenders to track payments of interest that has been “capitalized,” or made part of a loan’s principal balance, after a modification, the lawyers said.

Plaintiffs are asking the court “to step into the IRS’s shoes” and create reporting requirements by judicial mandate, the lawyers said.

The lawsuit seeks damages on behalf of California residents Lora Smith and Cynthia Himple and other homeowners nationwide whose mortgage interest was allegedly under-reported by the bank. The suit accuses the bank of breach of contract, unfair and deceptive business practices, and fraud.

The case is: Lora Smith et al v Bank of America, U.S. District Court, Central District of California, No 14-cv-06668

For the plaintiffs: Michael Brown of Michael R Brown Law Corp; and David Vendler of Morris Polich & Purdy

For the defendant: Peter Morrison and Douglas Smith of Skadden, Arps, Slate, Meagher & Flom

Tagged with →