question about discharging tax debt when it's for charge offs

[freshstartfl]

Trustee declared me No Asset the same day my 341 was held. I've done the final credit counseling, and now I'm just waiting the 60 days. I only have one concern left: taxes owed due to bad debt.

My attorney is nice, but scatterbrained. She was cheap, and you do get what you pay for. I decided to go with her because I know more than the average person about BK, credit, etc., and I use Pacer every day at my job. I figured whatever she missed, I'd catch. I did plenty of pre-filing homework, and on our first meeting, she was shocked at how prepared I was. She said I've been a super easy client. However, there's one thing I can't seem to get her to answer straight, she keeps saying she'll put her paralegal on it and "we will see what happens."

In October 2008, I was notified by the IRS that I now owe about $900 on my 2006 taxes due to charged-off debt. Yeah, the whole dreaded 1099 thing. Well, the IRS debt was included in my creditor matrix, and we also included the 2 creditors that charged me off and reported the debt to the IRS in the first place. Normally the IRS is not dischargable, but my attorney says that this type of tax debt can be.

Does anyone know if I might not have to pay this?? Is there even a remote chance I won't have to??

[keepmine]

Go to the IRS site and enter form 982 in the search function. That deals with exceptions to 1099C income. I know debts discharged in bk are exempt but, never thought about if they were chargedoff prior to filing. Also, if you were insolvent at the time the debt was chargedoff there is no tax liability.

[freshstartfl]

Well I was insolvent at the time the debt charged off, and the notification from the IRS gave me 30 days or something like that to claim that I was insolvent at the time. Unfortunately, I didn't act on that -- I did nothing.

[keepmine]

Get form 982 and follow the instructions.

[HHM]

you should be within the timeline to amend your return, so all you would need to do is amend your return by including form 982.

However, this issue is somewhat of a legal grey area. It appears that such a liability would be discharged (the underlying debt) and thus you would owe no tax liability as a result of filing BK at anytime. But at the same time, the IRS has already assessed the tax. I am not really sure how this plays out. However, you should file the form 982 and do a 1040X for 2006.

[freshstartfl]

My attorney mentioned that if the IRS doesn't file something claiming to be non-dischargable, I'm "probably" in the clear. But that makes no sense to me, b/c I owe Sallie Mae 22k and I know I have to pay that back, and she didn't say anything about Sallie Mae having to file anything in order to be non-dischargable. Should I do the 982 form after my discharge? Or right now, during my 60 days?

[HHM]

My attorney mentioned that if the IRS doesn't file something claiming to be non-dischargable, I'm "probably" in the clear. But that makes no sense to me, b/c I owe Sallie Mae 22k and I know I have to pay that back, and she didn't say anything about Sallie Mae having to file anything in order to be non-dischargable. Should I do the 982 form after my discharge? Or right now, during my 60 days?

Since the IRS is claiming you owe for 2006, you need to amend your 2006 return to include form 982 as soon as your case is discharged. You need the discharge first.

[freshstartfl]

Okay. I was planning on not doing my 2008 taxes until after my discharge, either. When I do get a refund, which is only about 1/2 the time, it's usually only $500 or so. So what I should probably do is file my amended 2006 return immediately after discharge, and ask for an extension on my 2008 return if it appears I'm due a 2008 refund? (To give them time to re-process 2006 and decide that i don't owe them money, and therefore not keep any 2008 refund I might be due?)

[freshstartfl]

Wanted to clarify... my last day for objections is March 23rd, so if I discharge shortly thereafter, I can still make the April 15th tax filing deadline. But if I need to have them re-process my 2006 return first, then I wouldn't have enough time, and would therefore need an extension.

[freshstartfl]

Also, I read Flamingo's comment in this thread: http://www.bkforum.com/showthread.ph...ighlight=turbo

... it sounds like if I claim insolvency for 2006, I have a higher chance of being audited, despite my BK filing in 2008? I also read the entire IRS publication here: http://www.irs.gov/pub/irs-pdf/p4681.pdf and I don't see any examples like my situation. I agree it appears to be a gray area.

... Should I call the IRS and just ask them? Seems so drastic, lol. Looks like I might have to, though, after my discharge.

[HHM]

Okay. I was planning on not doing my 2008 taxes until after my discharge, either. When I do get a refund, which is only about 1/2 the time, it's usually only $500 or so. So what I should probably do is file my amended 2006 return immediately after discharge, and ask for an extension on my 2008 return if it appears I'm due a 2008 refund? (To give them time to re-process 2006 and decide that i don't owe them money, and therefore not keep any 2008 refund I might be due?)

Yes, that would be sound plan.

[MNBK7guy]

I guess I don't understand why you would receive a 1099 for a charged off debt. I have had 2 of them that went that route and I never received anything in regards to them. As far I can see it, the charge off is from the original creditor, but the debt is not forgiven, they simply sell it to a debt buyer who assumes the full balance of the debt and try to collect it. In that scenario, no money is forgiven, you still owe the same balance plus probably some "fees". Did you reach a settlement agreement before hand where they agreed to lower the balance or something? I guess I am just confused and now worried that the IRS will be coming after me. Although I filed my taxes and received my refund already and they did not withhold any of the funds as if I had an outstanding tax debt.

[HHM]

I guess I don't understand why you would receive a 1099 for a charged off debt. I have had 2 of them that went that route and I never received anything in regards to them. As far I can see it, the charge off is from the original creditor, but the debt is not forgiven, they simply sell it to a debt buyer who assumes the full balance of the debt and try to collect it. In that scenario, no money is forgiven, you still owe the same balance plus probably some "fees". Did you reach a settlement agreement before hand where they agreed to lower the balance or something? I guess I am just confused and now worried that the IRS will be coming after me. Although I filed my taxes and received my refund already and they did not withhold any of the funds as if I had an outstanding tax debt.

It is possible to get a 1099 on a charge off...rare, but possible. You are correct, the normal course of business for a charged off account is to be sold. HOWEVER, under IRS rules for a 1099-C, if the creditor has not received payment in 36 months and there has been no active collection activity for the previous 12 months, the lender is required by the IRS to foregive the debt and issue a 1099-C. (if they sell the debt, this triggering event for a 1099 never happens vis-a-vis the selling lender).

[MNBK7guy]

Ok, thank you for the clarification. My debts never fell into that category then as they were collecting for years on it trying to get a payment before suing me for a judgement. I feel better now, whew!

[freshstartfl]

The 2 debts that this happened on, with me, were never sold. One was a signature loan at a CU, and the other,well, that's sort of an interesting story -- it was a cc debt with USAA bank. They farmed it out to a collections agency, who then proceeded to violate every single 3rd party disclosure FDCPA law under the sun on my debt. I found a lawyer who, for free, made one simple phone call threatening to sue them for FDCPA violations. USAA took control over the situation at that point, from the collections agency, and agreed to take the tradeline off my report and not hold me responsible for the debt. Lawyer did warn me I may see a 1099 for this. Funny thing is, all this went down in 2003 or 2004, and this 1099 showed up on my 2006 taxes.

On a related note -- my fiancee was joint on a car loan with his baby mama, who then fled the state with their child without telling him, in the car. His priority was obviously to start a custody battle, rather than making the car payments. (He won custody, by the way.) The vehicle was eventually repoed, and I've been concerned in the back of my head that one day he's going to see a 1099 for the deficiency. But based on what I'm reading here, he may NOT?! HSBC, the original creditor, immediately sold the debt. So... there's no chance of a 1099 on it now?!