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Form 1099-C CPA offers tips on Cancelled Debt and Form 982 | Insolvency and Exclusion for Qualified Real Property Business Debt | Form 982 red flags

 CPA Form 982 cancelled debt

If you find yourself unable to self-prepare Form 982, consider calling us. (910) 399-2705.

Form 1099-C CPAs are busy during the 2013 tax season working all the angles on Form 982, especially the insolvency and qualified real property business debt exclusions. Estimates say lenders issued 5.5 Million Form 1099-C(s) for 2012.  So you’re not alone, Many Form 1099-Cs arrived late and came as a complete surprise to the Client. Here’s some common Form 1099-C and Form 982 scenarios, followed by tips if you’re trying to self-prepare. I’ll mention some Form 982 red flags as well.

Common “Free Consult” Form 1099-C, Cancelled Debt and Forms 982 call Issues

  • Client receives an IRS Notice CP-2000, which proposes to tax the entire amount of cancelled debt, from a Form 1099-C the client never received. Many Form 1099-Cs spring from foreclosures and short sales. So, the Client moved and 1099-C can’t be delivered.
  • Clients receive a Form 1099-C and get a nasty shock when their tax software shows them a huge, unexpected tax bill. Cancelled debt on Form 1099-C automatically becomes taxable income unless you can exclude through Form 982. Typically, Form 1099-C clients had a bad financial year. Some of the stories are heart wrenching. Being taxed on money they never had feels like a sucker punch.
  • Client knows their rental property is under water and plans to short sell or abandon it. They want to optimize their chances of excluding the expected cancelled debt on Form 1099-C from becoming taxable income using Form 982. Yes, sometimes planning pays off.
  • Client presents a case where I’m sure Form 982 can exclude all cancelled debt from becoming taxable income. But the client is using Turbo Tax or H&R software and can’t get the program to flow properly.
  • Client want to know how much Form 1099-C will cost them. Answer? Additional tax due is 20-30% of the amount listed on Form 1099-C.
  • Client states there’s no local CPA that deals with Form 1099-C and cancelled debt.
  • Clients report abuse and heart-break from dealing with Banks that seem manipulative and inhumane.

“Don’t pay tax on Form 1099-C cancelled debt until you’ve explored all the avenues available on Form 982.”  
– Gary Bode, Form 1099-C CPA and Form 982 tax accountant

Form 1099-CPA Tips

Form 1099-C CPA says to expect a Form 1099-C

If you had a potential cancelled debt transaction (car repo, loan modification, foreclosure, shorts sale, credit card debt write off, student loan forgiveness etc.), expect the Form 1099-C. The banks use Form 1099-C to prove their own bad debt expense. So they will file it. We proactively pull IRS transcripts in some cases.

Expect Tax Software Issues

Clients report that some tax software doesn’t handle cancelled debt or Form 982. I think this means the calculations don’t flow, like most of the return does. In some cases you have to know exactly what the return should be, and then find a way to over ride the program. Tech support might help.

Form 1099-C arrives after Filing: Amending a Prior Return

Here you need to amend the return to include both the cancelled debt and Form 982. Remember Form 982 is the only way to exclude the cancelled debt from being taxable income. Amending isn’t rocket science but it tricky if you don’t have experience. Especially if the amended tax return isn’t a Form 1040-X. Don’t forget the Form 982 problems too. If you amend, look at the original return again to see if there’s previously unclaimed deductions or tax credits.

Form 982 Insolvency CPA tip

Form 982 CPAs usually start with the Insolvency conduit of cancelled debt first. Why? Sometimes insolvency has less future consequences. Start with the big items like Fair Market Value of the rental property, at the time of debt cancellation, and the associated mortgage(s).  Then you can look at the little stuff, like how much your paperback books are worth.

Paper File a Form 982 Tax Return to supply Supplemental Documentation

OK, let’s say we exclude $100,000 of cancelled debt from Form 1099-C through Form 982, worth $25,000 of federal tax. My guess the IRS doesn’t like to give up $25,000 without scrutinizing the return closely. So, here’s the Form 1099-C CPA trick.

  • Imagine your tax return gets kicked out of automatic processing and sent to an IRS Agent.
  • Next imagine an IRS employee dealing with 200 Form 982 tax returns per day. With perhaps a minute to decide; good pile or bad pile?
  • Imagine that Agent is skeptical about taxpayer representations.
  • What would that Agent want to see with the return? Proof of a lower Fair Market Value than the Form 1099-C or 1099-A figure? The HUD statement?

Figure out what this Agent needs to see to and give it to them in a concise, instantly comprehensible manner. Strip the explanation of emotion and side issues.

More than one way to Complete a Form 982

You can combine strategies on Form 982. For example, on rental property short sales we often combine the Insolvency and Exclusion for Qualified Real Property Business Debt conduits.

Don’t forget the Sale – Gain or Loss

Foreclosures, abandonments and short sales require a sales calculation. And of course a foreclosure doesn’t feel like a sale, but it is. So let’s say you had short sale on rental property that generated a Form 1099-C. Here’s the calculation for the gain or loss:

Purchase Price + Purchase HUD expense + Improvements + recaptured Depreciation + tax attribute aspect of Form 982 – Sales Price – Sales Expenses – Unclaimed Prior Rental Losses

Document every component in your tax records. A loss can be used to offset ordinary income, now and in the future.

Form 982 Red Flags

  • Using a different FMV than the Form 1099-C or Form 1099-A shows. Justify your assertion with documentation.
  • Round Numbers. Round numbers imply estimates.

We’re a Form 1099-C CPA firm that routinely deals with Form 982. Our virtual office means distance isn’t factor to engaging us for your cancelled debt issues. (910) 399-2705.

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