Form 982 CPAs saw many Form 1099-C(s) and Form 1099-A(s) arrive late in the 2013 tax season. If you receive a late or corrected 1099-C after filing, you need to amend the original return by filing Form 1040-X and Form 982. Form 982 may allow exclusion of the cancelled debt from taxable income. If the 1099-C or 1099-A reports Corporate or Partnership cancelled debt, you’d have to amend the Form 1120, Form 1120-S or Form 1065. But we’ll stick with Form 1040-X in this post. In this case, Form 1040-X reports tax return changes secondary to inclusion of Form 982, usually using the Insolvency and/or the Qualified Real Property Debt exclusions of Form 982. I’ll explain how a Form 982 CPA might approach amending a tax return to include cancelled debt.
Five common scenarios for amended tax returns (1040-X) we’ve seen in the last several years with 1099-C and 1099-A:
- Folks got the Form 1099-C, self prepared their 2012 tax return and paid taxes on the cancelled debt. They later realize there’s a Form 982 tax loophole and then want to amend 2012 with Form 1040-X and Form 982.
- Folks received a Form 1099-A. The bank continues collection attempts. Form 1099-C arrives in a future tax year. Which shouldn’t be a surprise, but often is.
- The 1099-C or Form 1099-A arrives late, after filing 2012. Again you’d amend the 2012 return with Form 1040-X and Form 982.
- The IRS sends you a tax audit Notice or Letter stating they received a Form 1099-A or Form 1099-C for 2012 and now wants more tax, penalties and interest. Again you’d amend 2012 with Form 1040-X and Form 982.
- The IRS sends a Notice stating they’ve received a Form 1099-S which reports the sale price of a property you owned. Of course they’d like to tax you on the full amount. Pull your IRS transcript if the sale was a foreclosure or short sale. Why? A form 1099-C is probably lurking there too, even though the IRS isn’t auditing you for the Form 1099-C, yet. And yes they don’t always catch both issues together.
The moral of the story? Anticipate Form 1099-A or 1099-C. If it doesn’t arrive, ask about it.
“When we amend a self prepared Form 1040 to include Form 982, we look for other unclaimed legitimated deductions and tax credits. For example, with rental property there can be an ordinary loss on the “sale” that can offset current and/or future tax liability.”
– Gary Bode Form 982 CPA and tax accountant
Step by Step Cancelled Debt, Insolvency, Qualified Real Property Business Debt exclusion and Form 1040-X and Form 982: Overview
Cancelled Debt – Form 1099-C
If your rental property was foreclosed, abandoned or short sold;
- The bank may issue a Form 1099-A when the property changes hands.
- The bank sells the property and applies the proceeds to the first and/or second mortgage.
- After exhausting collection attempts, the bank eventually cancels or “forgives” the remaining loan balance and issues Form 1099-C.
- The cancelled debt on Form 1099-C becomes taxable income unless you can exclude it through Form 982.
Other examples of cancelled debt include; cancelled credit card debt, foreclosure on your residence, short sales, mortgage loan modifications, car repo(s), deed in lieu of foreclosure etc.
Cancelled Debt and Form 982
Cancelled debt from Form 1099-C becomes taxable income. For a rule of thumb, figure you’ll pay taxes of about 25%-30% of the cancelled debt amount (ouch), unless you can exclude it using one or more Form 982 strategies. I’ve only seen one case where we couldn’t exclude at least some of the cancelled debt. I think many folks just don’t know about Form 982. The most common Form 982 scenarios are the Insolvency and Qualified Real Property Business Debt exclusions.
“Don’t pay taxes on cancelled debt without exhausting all the possibilities on Form 982 to exclude it.”
How CPAs work the Insolvency Issue on Form 982
- First check Form 1099-C for accuracy. Sometimes the date is wrong. If your car was repo(ed) on June, the 1099-C may still list the cancellation date as 12/31. By then, you may have made some financial headway. However in June, you were in dire financial shape and could exclude all the cancelled debt through Form 982.
- Sometimes the cancelled debt amount on 1099-C is wrong. Banks make mistakes.
- The Fair Market Value on Form 1099-A and/or 1099-C is almost always wrong. Here we get an appraisal or other documentation to prove the true Fair Market Value to the IRS.
- Next we gather information from you about your financial condition ias of June 1st.
“Remember Insolvency is only one of the conduits available to exclude cancelled debt on Form 982.”
Insolvency CPA Planning
Another scenario is proactive planning to maximize insolvency, perhaps coordinating multiple lenders. This sounds unethical, but some folks don’t want bankruptcy on their credit report. Insolvency CPAs can help position you, given enough time, to maximize the taxable income exclusion on Form 982.
Amending the First Return to Include Form 982 via Form 1040-X
CPAs amend prior returns on a regular basis. For lots of reasons. An Insolvency CPA:
- Starts with the original tax return.
- We look at what the IRS thinks is wrong with it.
- CPAs listen to the Client’s perspective on the tax issues.
- CPAs determine what the Client’s tax position could be.
- CPAs determine what the Client’s tax position should be.
- We review Form 1099-C for accuracy. The bank has to revise Form 1099-C if we can prove it is inaccurate.
- CPAs then fill out Form 982, using the insolvency calculation and/or other Form 982 conduits.
- Finally we prepare an amended return using Form 1040-X, including Form 982, and carefully explain to the IRS why the amended version is correct.
Other Sources of Information on Form 982 and Cancelled debt
- IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments.
- Form 982 Instructions.
- Our website. Click on 982 in the forms list in the left sidebar.
- Our website. Click on 1099-C in the left sidebar.
Please note Form 982 is complex and the insolvency issue is only one aspect of it. You can’t rely on our posts alone for self preparation. Why? Not because we’re giving you bad information. But because your particular circumstances must be considered. Read the disclaimers please.
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