OK help needed

[erchess]

Client moved out of OK to Florida in 2012. I am thinking that so far we'd be looking at a full year OK return but here's the kicker. Taxpayer basically was supported by family in 2013 and his only source of his own support was money left over from cashing in his 401K in 2011 and the had phantom income from cancellation of debt BUT so far no 1099s received. In any event he was insolvent immediately before the cancellations so he qualifies to not be taxed on that income. Is an OK return even called for here? Should he wait for 1099s before trying to report the cancellation of debt to the IRS?

TP is btw not a deadbeat. He returned to Florida to nurse his parents through health crises and now that they are stable he starts a good job next month. He also pays me on time in addition to helping me with my computer for no charge (he is an IT Pro).

[WhiteOleander]

Well, I would say start with the basics. What are the filing requirements in OK? If he does not meet those requirements, no return is necessary, whether he moved from OK or not. As for the cancelled debt, the company may not write it off until this year, or even later. There's no way to know w/o contacting them. Or, you could wait to see of he gets any of those hateful letters the gov't is so prone to write.

[mastertaxguy]

To file or not to file, is than an OK question to ask?

Filing starts a statue of limitations. Phantom COD income claimed in 2012 may impact receipt of a 1099-C in 2013 for a debt forgiven really in 2012.

[Snaggletooth]

Timing of the COD

I don't think there is income until the debt has been forgiven.

The timing of forgiveness is solely in the hands of the lender, not the debtor. They are not supposed to send a 1099-C until
they have written the debt off and forgiven the debt.

My thinking is the issuance of the 1099-C determines the year to report.

[mastertaxguy]

I don't think there is income until the debt has been forgiven.

The timing of forgiveness is solely in the hands of the lender, not the debtor. They are not supposed to send a 1099-C until
they have written the debt off and forgiven the debt.

My thinking is the issuance of the 1099-C determines the year to report.

Yes, we ned to RTF (read the form), but the form, like a road map, doesn't always tell the full story. Also, as many have found, anyone can issue a 1099 for something.

There is a line of Tax Court cases holding differently. When the debt actually was foregiven is not always the date on the 1099-C. For example, see Gaffney, TC Sum 2010-128 and Kleber, TC Memo 2011-233 and the cases cited in those opinions where the date on the 1099-C was held not to be dispositve on when the debt was foregiven. In each case, the taxpayers prevailed against IRS.

There is another angle on these. Recently, late 2011, a taxpayer of my acquaintance was sued by a collection agency who bought a bundle of bad debt from a major National bank which I cannot name because I cannot spell JP Morgan Chase correctly. JPMC had issued to TP a 1099-C in 2008. We (tp and I) argued to IRS in 2010 (responding to their examination/CP 2000 letter issued in 2010) ( successfully) that the debt had been cancelled on a specific date in 2005 and the taxpayer was insolvent on that date and t the IRS inquiry was timed bared. (TP didn't report the debt cancellation in 2005; if he had, he still would have been insolvent before, and after, the cancellation event.) In court, TP's lawyer, at TP's expense, wasn't successful in getting the lawsuit dismissed on state statute of limitations grounds without some sort of "convenience payment" to the collection agency and their local attorney but it was far less than the orignal debt. TP was not insolvent during 2008.