Question about a 1099-c

[astroboy]

I filed for chapter 7 pro se the other day on 1-22-14. Then yesterday the 25th I got a 1099-c from one creditor saying they wrote off the debt back in October of last year. They didn't notify me of anything until I got the 1099. Am I going to have to pay taxes on this?

Thanks.

[keepmine]

You'll need to file IRS form 982.That'll take care of the 1099C.
Use the search function on the IRS site for details.

[Pjmax]

I'm curious, does one have to wait for discharge to use Form 982, since technically the account hasn't been discharged.?

[kilowatt]

No you do not have to wait for the discharge. As a matter of fact the cancellation of the debt means it doesn't have to be included, but if I was filing I would include it any way with a notation that a 1099-C was received.

[justbroke]

Please consult a tax specialist for this. A 1099-C may be, in fact, a taxable event. There are some conditions where you do not need to pay the tax and that is by using Form 982 as suggested. Put it this way... the IRS will receive the 1099-C and the IRS will expect you to pay the taxes unless you have a reason that there is no tax (and I believe that Form 982 is what informs the IRS of these mitigating factors). Form 982 can be used if you can show that you were insolvent (outside a bankruptcy discharge). So you may be able to avoid the tax.

As for including the debt in the bankruptcy, I would still include it. Not all 1099-C's are created equal. Not all of them actually "cancel" (discharge) the debt. There is an issue where some 1099-C debt is actually not discharged/forgiven, but the 1099-C was only issued due to IRS regulations. The creditor may still consider it collectable and may still employ process or even sell the debt. Just make sure it is scheduled in the bankruptcy.

[astroboy]

The creditor that sent me the 1099-c is definitely listed in the petition. As stated in my first post, I filed for chapter 7 on 1-22, then on 1-25 I got the 1099-c in the mail. I had no idea they were sending it to me. So if I file my taxes in April, the bankruptcy case won't be closed yet, can I still include a form 982 so I don't have to pay taxes on it?

[bcohen]

Yes, go ahead and include the Form 982. The debt is (or will be) discharged in bankruptcy, so the "forgiveness" is not a taxable event.

[LadyInTheRed]

The debt is (or will be) discharged in bankruptcy, so the "forgiveness" is not a taxable event.

This should be confirmed with a tax professional. If the creditor actually forgave the debt before the debtor filed BK, the BK discharge may be irrelevant as far as the IRS is concerned. It may be that the debtor would have to have been insolvent on the date the creditor forgave the debt in order to claim the forgiven debt is not taxable income.

[justbroke]

As Lady writes, this type of event is precarious! If the debt was "canceled" before you filed bankruptcy, it could be a taxable event and the liability for the tax was created at that time. That means, that you did not discharge the underlying debt in the bankruptcy. You may need to show something else, such as insolvency at the time it was "canceled/forgiven" in order to avoid a tax.

This is why I, and the Lady, highly suggest you consult a tax professional so that you do not do this incorrectly and end up owing taxes and penalties.

[astroboy]

Just by looking over my bankruptcy petition and following the IRS instructions it's pretty easy to see that I was insolvent both before and after the debt was cancelled. So it looks like I just enter the amount cancelled on form 982, check the box saying it's for insolvency and that's it!

[justbroke]

Just by looking over my bankruptcy petition and following the IRS instructions it's pretty easy to see that I was insolvent both before and after the debt was cancelled. So it looks like I just enter the amount cancelled on form 982, check the box saying it's for insolvency and that's it!

I'm sorry, but it's not that simple. If you check the insolvency box, the IRS will want proof. A bankruptcy is not proof that you were insolvent when the debt was canceled (if the debt was canceled before the bankruptcy). I know I'm sounding like a broken record, but tax issues related to 1099-Cs is not an area to "guess" and just fill out Form 982.

You really need to consult an expert.

[bcohen]

I'm sorry, but it's not that simple. If you check the insolvency box, the IRS will want proof. A bankruptcy is not proof that you were insolvent when the debt was canceled (if the debt was canceled before the bankruptcy). I know I'm sounding like a broken record, but tax issues related to 1099-Cs is not an area to "guess" and just fill out Form 982.

You really need to consult an expert.

In practicality, how often does the IRS challenge claims of insolvency, especially when the alleged "forgiveness" of the debt takes place soon before a bankruptcy? My guess is almost never.

I remember back in 2008, one of the companies I worked for during that tax year shorted me on my final paycheck, deducting $500 for equipment that was allegedly damaged while assigned to me. This alleged incident had happened months prior, btw. When I picked up my final paycheck, I was surprised to see that it was for only about $100 for two weeks, and that a letter was enclosed indicating that the money was withheld and why.

When I filed my 2008 taxes, I filed a form 4852 (Substitute for W-2) instead of sending the actual W-2 and restated the gross wages to be $500 less than the amount claimed on the W-2. I sent a photocopy of the letter and filled in as the reason that the money illegally withheld from me was not income, so I cannot pay taxes on that amount. Everybody told me that I'd get audited, penalized, etc. Well guess what? No audit ever happened, and I got my tax refund just fine, in the amount that I claimed based on the restated income.

I suspect that in OP's case, the result will be the same. The IRS has much bigger fish to fry than going after an obviously poor person for taxes on phantom "income" due to an alleged "forgiveness" which might very well have legitimately been included in the bankruptcy anyways. Nor are they going to bother splitting hairs on just how "insolvent" you are/were. I would not waste money on an attorney or accountant over this matter, and I wouldn't be losing sleep over it either. Fill out the Form 982, check the boxes for insolvency and bankruptcy, and send it in with your tax return.

[justbroke]

In practicality, how often does the IRS challenge claims of insolvency, especially when the alleged "forgiveness" of the debt takes place soon before a bankruptcy? My guess is almost never.

I can't say as I don't ahve any experience in this area. I did read one article where the person had to send in a lot of documentation, and they had filed bankruptcy after they received the 1099-C. Of course, an individual case may differ, but I'm relatively sure that the tax return, and the 982, will be reviewed manually.

I have myself sent in substitute 1098s and have not had issues. I suppose this poster can just do it himself and if they are asked for documentation, they just provide it at that time. I was trying to save them some potential grief.

[LadyInTheRed]

Of course, an individual case may differ, but I'm relatively sure that the tax return, and the 982, will be reviewed manually.

And here is evidence that reviews do happen: http://www.bkforum.com/showthread.ph...for-insolvency