Judgement Creditor-Bad Debt?

[stalker001]

My client (individual) hired a firm to do some work relating his tax liability with the IRS (offer of comprosise, levy release, etc). He paid them about 4K. They have not done anything for him. The artbitration forum decided in his favor. He believes that it would be hard to get that arbitration award. At least, a sheriff could not execute it because he was unable to locate the property (Nulla Bona).
Could someone please provide me with direction I should take here or point me to a similiar discussion?

Thank you very much!

[Koss]

Bad Debt

See Publication 17, page 105, Nonbusiness Bad Debts.

Nonbusiness Bad Debts

If someone owes you money that you cannot collect, you have a bad debt. You may be able to deduct the amount owed to you when you figure your tax for the year the debt becomes worthless.

Generally, nonbusiness bad debts are bad debts that did not come from operating your trade or business, and are deductible as short-term capital losses. To be deductible, nonbusiness bad debts must be totally worthless. You cannot deduct a partly worthless nonbusiness debt.

Genuine debt required. A debt must be genuine for you to deduct a loss. A debt is genuine if it arises from a debtor-creditor relationship based on a valid and enforceable obligation to repay a fixed or determinable sum of money.

Basis in bad debt required. To deduct a bad debt, you must have a basis in it—that is, you must have already included the amount in your income or loaned out your cash. For example, you cannot claim a bad debt deduction for court-ordered child support not paid to you by your former spouse. If you are a cash method taxpayer (as most individuals are), you generally cannot take a bad debt deduction for unpaid salaries, wages, rents, fees, interest, dividends, and similar items.

When deductible. You can take a bad debt deduction only in the year the debt becomes worthless. You do not have to wait until a debt is due to determine whether it is worthless. A debt becomes worthless when there is no longer any chance that the amount owed will be paid.

It is not necessary to go to court if you can show that a judgment from the court would be uncollectible. You must only show that you have taken reasonable steps to collect the debt. Bankruptcy of your debtor is generally good evidence of the worthlessness of at least a part of an unsecured and unpreferred debt (emphasis supplied).

Is most or all of your client's tax liability associated with a Schedule C activity, or a pass-through business entity in which he was an active participant? If so, then the money he lost might be a business bad debt. The criteria for determining that it is a bad debt should be the same. The big difference is that if it's a business bad debt, then it's an ordinary loss, not a capital loss.

BMK

[stalker001]

Debtor-Creditor Relationship

Thank you, Burton.

My concern is that it is hard to say if there a genuine debt in this situation. This issue arose from my client not filing his tax returns for several years and it he was an employee at that time.

[Burke]

If the firm was paid $4k to deal with the tax matters you state, could not he have deducted it on his 1040 subj to 2% in the year paid? If he ever collects on the judgement, he would have to declare as income in the year received, of course.

[stalker001]

He does not itemize

Thank you. He does not itemize. It was related to his Federal tax liability.