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[tobee43]

It's nice to make blanket statements but when some things are done during the tax filing process, and claiming insolvency is one or more of them and there are 1099's involved, the red flags are waiving. It doesn't matter what the economy is or who is getting them and who is not. If one wants to take settlements on debt and not file BK, consult at that time with a tax professional and if you go through with it, have your taxes professionally done.

this is soooooooo important what flamingo is saying here. i don't care what the circumstances are, you should seek the advise and also have someone prepare you taxes if you do get a 1099C, A, S,D, C, whatever. that way they do the research TODAY when it's happening. most good tax consultants will in fact contact the IRS direcly if they question any part of a return to make certain it doesn't get kicked back.

lady makes an interesting point.

i don't care how much i THINK i may know about taxes, i would never go it alone!! ever. it's simply not worth a few hundred in the long run.

[OhioFiler]

It's nice to make blanket statements but when some things are done during the tax filing process, and claiming insolvency is one or more of them and there are 1099's involved, the red flags are waiving. It doesn't matter what the economy is or who is getting them and who is not. If one wants to take settlements on debt and not file BK, consult at that time with a tax professional and if you go through with it, have your taxes professionally done.

It wasn't a blanket statement. I used the word most and indicated there remains a slight risk of audit. I merely want these posters to recognize they are not the typical audit candidates for the IRS and refusing to reach settlements based on the fear of IRS scrutiny should be a low priority when reaching a decision on the matter.

[Flamingo]

It wasn't a blanket statement. I used the word most and indicated there remains a slight risk of audit. I merely want these posters to recognize they are not the typical audit candidates for the IRS and refusing to reach settlements based on the fear of IRS scrutiny should be a low priority when reaching a decision on the matter.

Anyone can be audited - the risk rises when one does something way different than done in previous tax filings; and 1099's are matched up via SS numbers to one's tax return to see if the funds are included and if there is something different as to the tax return (i.e. filing for insolvency), those returns are flagged, pulled and reviewed. If something is amiss, the IRS will contact the filer for further information or if something is missing; if something appears way out or the information requested not supplied, revised, etc., here comes the audit or the return can just be picked for audit. That is why, in instances such as this (claiming insolvency, forgiven debt, etc.), one should consult with a bk attorney, tax or financial professional before making any decisions as to what to do. Over the years, many postings have been made in this forum as to forgiven debt (debt not discharged through BK) and settling with creditors; many of those posters had no idea that they were going to get 1099's for the unsettled portion of the debt and posted in panic as to what to do and why did they get the 1099. If they did their homework ahead of time, they would have known what to do or to expect. To advise posters their chances of getting audited is only slight as to all this is like telling posters the trustee is not going to review their financial information prior to BK confirmation. One should go into the entire thing expecting the IRS to take notice and have their returns done by a professional in case their return is flagged by the IRS. It can take several years for that to be done - one can file this year and get a notice from the IRS several years down the road as to their current 2011 return. Nothing is guaranteed.

I had the IRS come after me for penalties and fees on a tax agreement for taxes owed during our Chapter 13 plan ($1,500) which were not included in our Plan. Since wer were in Chapter 13 and could not pay it in full, the IRS will not allow two payment plans at once (they consider Chapter 13 that includes federal taxes to be a payment plan), we had to voluntarily send in an amount each month we could afford and had three years to do it. They came after us two years later for the interest and penalties on that amount and it only amounted to a few hundred dollars. If they come after someone for a few hundred dollars, just think what they will be reviewing if someone has thousands of dollars in 1099s for forgiven debt.....

Protect oneself - get professional advice before making any decisions.

[SMinGA2]

This makes a good point.

I do have a friend who decided to go the route of settling all her debt, rather than ch. 13. (She would have been a high payback %. Income is relatively high for her expenses, but debts got out of control while she was out due to extended medical issues. She got healthy & back to work.) I think she may still have some small ones left, but the majority were settled in tax year 2010 for around 25% of the balance. The 1099Cs were all dated 12/31/2010. She used form 982, attached a listing of assets and debts, never heard a peep from the IRS. For any further 1099Cs, I don't know if she'll be able to claim insolvency. As you mentioned - the previously forgiven debts are no longer owed. In her case however, it worked out for her. Even considering the potential tax liability its less than what she owed originally.

Something else to keep in mind about insolvency. To exclude the forgiven amount from income, you must be insolvent immediately before the debt is foregiven. So, you may be insolvent when you settle one debt, but if you settle a second debt the next day, you may no longer be insovlent since you no longer owe on the first debt.