A new client told us at her first meeting that she and her husband were in the process of filing bankruptcy, mostly due to extremely high credit card debt and that they would need their 2018 tax return as soon as possible. The wife also told us that her husband had gone to an inpatient rehabilitation facility for alcoholism two separate times in 2018. She just recently brought us the rest of her tax documents along with the paid invoices from the rehabilitation facilities totaling $45,000+, all of which were paid for using the credit cards that are being included in the bankruptcy. She also mentioned in conversation that she had stopped paying on credit cards last year and that the credit card companies were calling her every day. We have never encountered this situation, but it just feels wrong to take this deduction when the client has stated outright that they do not intend to actually pay this expense. We would prefer to send her elsewhere, but she is a referral from a good client and also has ties to several other clients. Before we refuse to prepare her return and create waves/questions with our other clients, we were just wondering how other practitioners would handle this situation?
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Without looking anything up, she took out a loan in 2018 of $45k to pay tax deductible expenses. She deducts those expenses on her return. The loan gets cancelled in 2019 and she receives a 1099C for $45k. She picks up $45K cancellation of debt income on her 2019 tax return."Taxation is the price we pay for failing to build a civilized society." ~ Mark Skousen -
Are they filing Chapter 7 or 13?Comment
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I believe she had started Chapter 7 filings, but when the attorney heard that she had prior year income tax debt in excess of $20K, they started talking about a Chapter 13, but nothing has been filed yet.Originally posted by kathyc2 View PostComment
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Not an expert on bankruptcy by any means, but I believe to qualify for 7, their income would need to be fairly low. With 13 restructuring, they will need to pay some debts.
Although it may not seem morally right to take a deduction for credit card debt that won't be repaid in full, a quick search did not return that it goes against regulations.Comment
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Interesting, if she is granted Chapter 7 I do not think loans made to her personally will come back as income.??? In fact if the Chapter 7 is granted I think a lended can get in trouble if filing a 1099C. The lender can be at the table with the creditors to voice their problem - they can be secured to the extent of assets hooked when the loan happened. Good question??Comment
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