1099-C Cancel Debt

[geekgirldany]

I just wanted to double check on this.

Customer brings in notice from the IRS for a 1099C and 1099R they did not report in 2004. 1099C list a cancellation of debt. Customer first told me that this amount is from a theft loss of a boat. The boat was stolen and the mortgage/loan company said they would take the money from the insurance company to pay off the mortgage/amount still owed on the boat. The mortgage company owned the insurance company as well. I told the customer that a 1099C should not have been sent if the insurance company paid off the rest of the loan.

So today we called the the mortgage/loan company. He told the rep that the loan company told them that if they pay a certain amount then they would forgive the rest owed on the loan. That since the loan company owned the insurance company that there would be no effect on her taxes. I asked the rep if the insurance company paid off the rest of the loan. He said no. My customer did not receive any additional money from the insurance company for the theft. I tried to tell him why he had to pay taxes on it and he is calling the IRS about it.

Am I correct that the 1099-C still has to be included in income since the insurance company did not pay the debt.? If this was a theft then could a 4864 Casualty/theft loss be filed on Schedule A (amend 2004)? This might help bring down the taxes owed.

Thank you

[Bees Knees]

You are correct. The 1099C is for the portion of the loan that was not covered by insurance, and that the mortgage company wrote off as uncollectible. The taxpayer must report the 1099C as cancellation of debt income.

In turn, the taxpayer gets to take a casualty loss for the theft of the boat. The casualty loss for a theft is the lesser of the basis in the boat, or the FMV of the boat, minus the amount reimbursed by insurance (including any amount paid to the mortgage company), minus $100, minus 10% of AGI.

Bottom line, the taxpayer may have to report more in cancellation of debt income than be able to deduct as a casualty loss.

[geekgirldany]

Thanks so much Bees. There may not be much of a casualty loss after the 10%

[geekgirldany]

Reopening this thread. Little venting.

Customer called IRS and he says IRS Rep told him to call the Loan Company that did the 1099C on the cancellation of the debt and reverse it. That he suffered the loss and there should not have been one filed. I told the customer that even though the IRS Rep told him this that I believe it is incorrect. I asked if he got the IRS Rep ID #... he did not. He says he still wants to call the loan company to tell them to correct it.

Just need some feedback. The only thing I know to do is a 3 way call with the tax practioner hotline. Maybe then he can hear what needs to be done. If the IRS says to call the loan company to change it then I will. If they say you have to pay it I feel like the taxpayer will still argue on it.

Just feeling very frustrated here. Customer is standing strong that he shouldn't pay it. Oh and the IRS Rep also told him there was no withholding on the 1099R he received in 2004. I have notice that shows that they did and have been given credit for it.

[Bees Knees]

Rather than stress out over a misunderstanding of the rules, let your client call the mortgage company and ask them to correct the 1099C. Of course they won’t, because they have a whole division of CPAs who specialize on their reporting obligations. The mortgage company is going to follow the rules, whether your client likes it or not.

Then it can be their fault and not your fault that your client doesn’t get his way.

[geekgirldany]

Well I did get the number of their accounting division. Customer always wants to do a three way. Says he can't understand what they need. Good idea Bees we will just call them. They are not going to change it liked you said.

What probably happened is my customer received the 1099 and just pushed it aside. Always comes up three years later.

Thanks Bees for the help.

[JON]

Confused

You carry insurance at what value?? I think mortgage company and insurance company owes you more of an explanation. What coverage did the client have?? Why did not the insurance cover it?? Why was it forgiven without going after your client? I have never heard of that. If the lack of payment from the insurance company to the the mortgage holder is some accounting game between the two your client does not get a 1099 for that. Tough dealing with the insurance companies, but I would tell them you need a detail explanation so you can understand why your client is picking up taxable income. If that is not going to be supplied then say you will hope the insurance commissioner of your state will be able to help you understand it.

If your client has an insurance agent see if he has any brains or connections???

Good luck...

[Bees Knees]

Good point Jon. However, there are a number of reasons why an insurance company may not pay off the full amount of the mortgage owed. One is called a deductible.

[geekgirldany]

Previous Post
"He told the rep that the loan company told them that if they pay a certain amount then they would forgive the rest owed on the loan. That since the loan company owned the insurance company that there would be no effect on his taxes."

Doesn't really make sense does it? My customer lost a boat but did not get payment from the insurance company for that loss? The loan company just says they will forgive the debt owed on the loan if they pay a certain amount. I think I need to ask some more questions as you suggest. I don't understand why my customer would settle that way. Bad thing is that my customer has no information regarding this. No letters, statements, etc of what happened. Makes it a little harder.

Might be more to the story.

[geekgirldany]

Just thought some might be interested in a update on a couple of threads I posted previously. The customer called several numbers that we were given by the rep. I was on three way. I found out a little more to the story. Actual theft happened in 98. My customer fought with the insurance company to pay off the loan on the boat. He said they went back and forth for several years. He stopped paying on the boat loan and the loan company said if he did not pay they would put it on their credit report. In 2004 the boat loan did go into collections. Customer states that the person he dealt with said if he would pay $3,000 they would forgive the rest of the debt. Since the loan company also owned the insurance company that they would considered it settled. He would not owe any tax and there would be no bad marks on his credit report.

Well obviously this didn't happen. Customer states it did go on his credit report which he had to fight to get it off. Now this with the IRS. We never did get to the right person last week. But have another number to call. I will update if this does get resolved. Customer believes that he can talk the IRS to taking off the 1099-C. I told him I wasn't so sure about that. I think the customer was really tricked on this.