2020 charge offs, 2021 Tax filing, and debt cancellation during a 2022 bk

[bornfree2]

Its coming time to file 2021 taxes. As i reviewed the 1040 Schedule 1 form as well as IRS Pub 4681 (Canceled Debts, Foreclosures, Repossessions, and Abandonments), I see mention in Part 1 Line 8 (c) for Cancellation of debt. I am just beginning to wrap my head around this but have some questions.

Original creditors charged off balances in 2020 (i think?). Throughout 2020 or 2021, I did not receive any 1099-C or 1009-MISC notices from them. I havent gotten any notice like that in 2022. Is this triggered after a bankruptcy is filed or goes through?

If a bk is being planned during 2022, is this something that i will need to deal with next year when i file 2022 taxes?

Should i be waiting till last minute to file my 2021 taxes to see if i get a 1099 from them? I do not want to do that as if this experience has taught me anything is to get ahead of the dominos that may fall ahead.

If a BK in 2022 takes forever and is eventually successful, I assume an amended return would cure it

edit: I can not understand the reasoning that debt owed is income received. Especially since large portions of rolled over debt year to year is interest that is income to the creditor! Yet they write it off as an 'expense' and I receive it as taxable income. Then i have to also pay Uncle Sam tax for something not originally owed to him.

edit 2: re-reading page 3 of Pub 4681, it says "Form 1099-C If you receive a Form 1099-C, that means an applicable entity has reported an identifiable event to the IRS regarding a debt you owe....Code A—Bankruptcy. Code A is used to identify cancellation of debt as a result of a title 11 bankruptcy case."

edit 3: it goes on to say "caution: Even if you didn't receive a Form 1099-C, you must report canceled debt as gross income on your tax return unless one of the exceptions or exclusions described later applies." ... ?? ...

[justbroke]

You do not need to deal with IRS Form 982 (Reduction of Tax Attributes) until you receive an IRS Form 1099-C (not the 1099-A version). These are not always sent by creditors.

I always highly suggest that anyone that receives an IRS Form 1099-C (Forgiveness of Debt) use a qualified tax preparer or accountant to complete the IRS Form 982 correctly.

I cannot give tax advice, but you should look to your tax preparer or accountant for any information. If you ever thought the U.S. Bankruptcy Code was a big deal... the tax code is 10X worse in its many interpretations. For example, how does someone know a debt was "canceled"? Does canceled = forgiven? Is a charged-off debt a canceled debt that has been forgiven? Best left to tax experts.

[bornfree2]

You do not need to deal with IRS Form 982 (Reduction of Tax Attributes) until you receive an IRS Form 1099-C (not the 1099-A version). These are not always sent by creditors.

Does the charge off of a debt by original creditor trigger a reporting requirement on the creditor or is it the bankruptcy filing and/or discharge the event?

Yeah, im not going to be law libary researching the tax code any time soon. Out of ram error message!! 404 not found!

[justbroke]

Does the charge off of a debt by original creditor trigger a reporting requirement on the creditor or is it the bankruptcy filing and/or discharge the event?

Not necessarily. A charge-off is an accounting issue. Whether or not or when the creditor decides to "forgive" the amount is another story.

That's why I can't answer the question as to whether an otherwise innocuous "charge-off" is considered by the IRS to be a "cancellation" of the debt.

Personally, I would not worry about this. I received only 1 1099-C from my bankruptcy.

I think you're overthinking this because it is never an issue for someone with discharged debt.

[bornfree2]

Personally, I would not worry about this. I received only 1 1099-C from my bankruptcy.

I think you're overthinking this because it is never an issue for someone with discharged debt.

Im just unclear if this is a 2021 tax return issue or a 2022 tax return issue if a bk is to be planned in 2022. Again i appreciate and respect if you cant answer as its a tax question that needs qualified expert.

[justbroke]

For me, it's only an issue if I receive a 1099-C (Forgiveness of Debt). If I receive that in 2022, then that's for my 2022 return which I'll file by April 15, 2023.

If I already received a 1099-C and it was from 2021, and I filed bankruptcy before my taxes, then I may be inclined to file a 982 along with my 2021 tax return. But this is the issue... is the fact that it was forgiven before the filing of bankruptcy a problem? That's a tax question... I can't answer.

The reason to consult a tax professional is that there are other reasons on the 982 which would reduce your so-called "tax attributes" for the filing year. One such other reason could be insolvency. Bankruptcy certainly proves insolvency, but there's more than one reason for filing an IRS Form 982. That's where a tax professional can help.

As I stated... this is hardly an issue for debtors in a bankruptcy. I only received 1 IRS Form 1099-C... ever.

[bornfree2]

I just couldnt resist researching this with my legal books at hand. In the topical index of Norton Bankruptcy Law and Practice - Norton Bankruptcy Rules (p. index-130,131) under Tax, Discharge of indebtedness, i find the following Tax Code references.

• 26 U.S. Code § 108 - Income from discharge of indebtedness
• 26 U.S. Code § 1017 - Discharge of indebtedness
• 26 U.S. Code § 6658 - Coordination with title 11
• 26 U.S. Code § 1398 - Rules relating to individuals’ title 11 cases

I also found that in 11 USC 521 (j) one of the Debtor' duties is to file taxes (or file an extension) after the start of the BK case or risk dismissal

"(j) (1) Notwithstanding any other provision of this title, if the debtor fails to file a tax return that becomes due after the commencement of the case or to properly obtain an extension of the due date for filing such return, the taxing authority may request that the court enter an order converting or dismissing the case."

Extensions to file taxes are automatic and easy. Just one form and one stamp. Cheap insurance while I figure things out completely.

[bornfree2]

Ah! I think i found what i was looking for. Here is the tax code that instructs the creditors to send the 1099-C to debtor

• Sec. 6050P Returns relating to the cancellation of indebtedness by certain entities

In particular this:

"The written statement required under the preceding sentence shall be furnished to the person on or before January 31 of the year following the calendar year for which the return under subsection (a) was made"

So in my understanding this means that Debtor should receive a 1099-C on or before January 31 in year after a successful discharge. Thusly, a successful 2022 bk case would be declared in a 2022 Tax return.

But be sure to read the links on the right side bar under Section 6050P Resources!

For anyone else reading this, I may be entirely wrong, this is from 10 minutes of looking into this. Do your own research and consult qualified legal/accounting advice. I am all spun around looking into this