Cancellation Consumer Debt

[Snaggletooth]

Taxpayer received 1099-C for appx $8000. This was credit card, and most of it was for purchase of furniture. Taxpayer's debt outweighs the value of their assets by over $100,000. In fact, a rental unit is under short sale in a few weeks.

TTB 14-10 col. 2 bullet #6 indicates debt forgiveness is not taxable if taxpayer is insolvent. TTB dedicates the next few pages to forgiveness associated with mortgages.

This debt was not for a mortgage, but I'm assuming the language in TTB 14-10 applies so long as taxpayer is insolvent. Taxpayer was laid off in 2009, has a 1099-G for Unemployment, and does in fact have a mortgage in the lurch. Taxpayer did find self-employment work.

Although not taxable, I am afraid not to report the 1099-C. How is the best way to report both the 1099-C and a statement of affairs for assets and liabilities to support the insolvency?

[erchess]

Hey Snags

Any cancellation of debt that occurs when one is insolvent immediately before the cancellation is a non taxable event.

As for how it's done you fill out the almost self explanatory 1099C and 992 screens in your software. If I can do it you certainly can.

If I were you I would prepare and get him to sign a list of his assets and liabilities and give me documentation of the liabilities in order to protect both of you from his not having enough documentation in the event of an audit.

[taxea]

I know that the IRS computer matches all income reported to them against income reported on the return. When I get a 1099 that is not taxable I report it on the return and do an adjustment to back it out. I dont know what program you are using but ProSeries has a magnifying glass icon that when clicked on opens an explanation box. I use that to make the adjustment and in this case would say
adjustment for non-taxable 1099C refer to Form 982.

[JohnH]

This thread prompted me to read up a little on debt forgiveness since I don't have anything else to do this morning.

I was surpirsed to note that IRA and retirement funds are counted in determining insolvency. It makes sense, but I just had not thought of it before now. I'm probably the only person on this forum who didn't know that.

I've had a couple of calls from people asking about how this all works and I suspect we will all be seeing more of this in the coming months. I even had a repairman doing some work in my office last week and we got into a casual conversation about the issue as it related to a problem he was dealing with. (I think he offset part of the labor on the repair bill by the time I spent discussing it with him, so his employer may have inadvertently paid for some free advice for him.) Personally, I dread getting involved in working up one of these, both from the liablity standpoint and the emotional aspect of it.