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Form 982 Insolvency CPA discusses Credit Card Cancelled Debt | 1099-C CPA

Form 982 Insovency CPA

Gary Bode, CPA: you may not need a Form 982 Insolvency CPA to prepare your tax return. But consider giving us a call if you run into problems. Sometimes experience impacts the tax return’s bottom line. (910) 399-2705.

Form 982 Insolvency CPAs see lots of Form 1099-C(s) for cancelled credit card debt. Hi, I’m Gary Bode, Form 982 CPA who sees insolvency cancelled debt cases. We have a virtual CPA office to offer excellent service wherever you live. However some folks self-prepare their taxes. Here are some tips.

Here’s the usual progression of Insolvency Cancelled Credit Card debt: from cash flow to resolution.

  • Client begins to experience poor cash flow. You’re not alone.
  • Clients turn to credit card companies to finance their needs. You’re not alone.
  • Credit card companies begin to badger you once you miss a payment. You’re not alone.
  • Client settles with the credit card company. Lots of ways they do that.
  • A Credit Card company cancels some part of the credit card debt.
  • Credit Card company sends a Form 1099-C to the Client and IRS in January. Form 1099-C lists the amount of cancelled credit card debt and the date of cancellation.
  • The IRS assumes the Form 1099-C is correct.
  • The cancelled credit card debt on Form 1099-C becomes taxable income on Line 7 of Form 1040.
  • Through Form 982 you might exclude some of the cancelled debt from taxable income.
  • Insolvency is one avenue allowed on Form 982.
  • The insolvency exclusion calculated on Form 982 shows as a negative dollar amount on Line 27 of Form 1040.

Common Problems Form 982 Insolvency CPAs see:

  • Form 1099-C never arrives. Client doesn’t understand the tax obligations, so the cancelled credit card isn’t included on Line 21 of Form 1040. The IRS eventually sends you  a CP 2000 Notice demanding taxes on the entire cancelled debt amount. I’ve seen IRS demands exceeding $100,000. Ouch!
  • 1099-C isn’t correct. The amount is wrong or the date is incorrect. Remember though the IRS assumes Form 1099-C is correct until you prove differently.
  • Client doesn’t understand Form 982 and all the different sections and specialized terminology.
  • Clients must amend the earlier return to include the cancelled credit card debt and exclude it via Form 982.

Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment), even sounds intimidating. We have clients who tell us other CPAs don’t want to prepare it, but I think that will be different in 2013. There’s just so much cancelled debt that more CPAs have to learn how to work with it. If you run into trouble during self-preparation of a return encompassing cancelled credit card debt and Form 982, consider giving us a call. Sometimes it’s prudent to hire an experienced CPA. (910) 399-2705.

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2 comments to Form 982 Insolvency CPA discusses Credit Card Cancelled Debt | 1099-C CPA

  • Good Morning Gary:

    Hope all is well…

    I am at wits end and have a simple question, I am NOT asking for any professional advice, just if you know of something?.

    I have a real investor client who invested in rental homes buying them in an LLC and NOT in his personal name, he owned about 20 properties (not in his personal name, but all were titled in the LLC name which he owns 99% and another partner own 1% of which they filed a 1065 on for years while they rented them), needless to say in 2012 he was losing his butt on them and made a deal to Deed in Lieu them back to the bank to avoid foreclosure which he gave back Deed In Lieu when they went bad this year.

    Now I know if this was a personal residence and his liabilities were greater than his assets he would qualify for an INSOLVENCY (Form 982) exclusion to avoid paying the cancellation of debt income on later next year when he might get 1099-C’d.

    THE QUESTION, is since these were all rentals, titled in the LLC name, when he gave them back Deed in Lieu, he probably will receive Cancellation of Debit income after beginning of next year for these 20 homes he gave back with the Cancellation of Debit income being issued to the LLC as the properties were titled to the LLC (entity) and NOT himself personally. He before and now still has a million dollar NEGATIVE net worth, so…..

    THE QUESTION is have you ever heard of how to address COD income issued to a LLC where the LLC and the owners are negative (insolvent),
    BUT HOW TO HANDLE THIS FOR AN ENTITY (LLC) 1065 return to not have to show the COD income and address it properly so it doesn’t flow to the LLC owners as they are insolvent too and how to account for writing off the COD income somehow where it is NOT taxable to the LLC at year end due to some sort of INSOLVENCY EXEMPTION for LLC’s with owners who lost their butts and are negative net worth?

    I know how to handle this for a person on a primary residence,
    BUT never had a LLC (Entity) where I had to address COD income on rental properties owned by an entity (LLC) when they were negative and technically insolvent along with the client personally?

    Any directions, guidance or areas or places to point me to find my answer,
    FYI the IRS is useless and is there publication as how it applies to an entity (LLC).

    I appreciate anything you can reply with….

    • Interesting scenario Jason. Always happy to help another accountant. It might take a little research. You can use Form 982 with the Form 1065. I think all of the debt cancellation may be excludable. Give me a call when the 1099-Cs arrive and I’ll partner up with you.

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