Have a Tax Question? Ask a Tax Expert
Thank you for giving me the opportunity to assist you. I will give the best answer that I can with the information provided.
You should definitely not ignore this correspondence, and should complete the appropriate form(s)/letters of explanation that they have requested.
It is possible that you may have reportable income from the foreclosure from either capital gain or cancellation of debt or both. It depends upon whether this property was a personal residence or not, whether the loan was a recourse loan or not, and the general facts and circumstances of the foreclosure. Generally, there is an exclusion of income allowed for CA for principal residence from tax years 2007 through 2012, but there are some differences depending on the date of the foreclosure.
I am providing a link for more information about this, and hopefully you can find the situation that applies to you so you will know how to proceed.
I would urge you to collect any Forms 1099A or 1099C and any other income information that you have and bring your information with the letter you received to a reputable tax professional, so that they can help you answer this request, and file the form that the CA FTB is looking for. If you ignore the correspondence they will most likely assess tax and penalties, and that will be much harder to deal with.
Please let me know if you need additional assistance.