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What is an IRS Form 1099-C, Cancellation of Debt? | Cancelled debt CPA discuses battling Form 1099-C with Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment) | Form 4797

Cancelled debt CPA battles Form 1099-C, Cancellation of Debt, with Form 982

This post offers tips on how to battle an IRS tax Form 1099-C with Form 982. Our virtual office means distance between CPA and Client is irrelevant. If you like what you read call for a free consult. (910) 399-2705.

As a cancelled debt CPA, I hear new clients express confusion over IRS tax Form 1099-C, Cancellation of Debt, and, especially the Form 982 instructions. So here’s an over view of battling cancelled debt on Form 1099-C with Form 982.

The 1099-C, Form 982 and Form 1040 battle

What is an IRS Form 1099-C, Cancellation of Debt?

Form 1099-C reports cancelled debt to you and the IRS. Cancelled debt arises when a lender forgives some of your debt. I handle cancelled debt for individuals, Partnerships and S Corporations. Here’s a partial list of circumstances that create cancelled debt:

  • Car repossessions.
  • Forgiven credit card debt.
  • Home foreclosures.
  • Home short sales.
  • Loan modifications like HELOC.
  • Rental property short sales.
  • Rental property foreclosures.

When any debt gets forgiven, the lender must issue a Form 1099-C to both you and the IRS. Why is cancelled debt taxable income? Because the IRS says so. But if you think about it for a minute, cancelled debt is income because you’re no longer obligated to pay it. The amount in box 2 of Form 1099-C is taxable unless you can exclude some or all of it through Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment).

“Cancelled debt on IRS tax Form 1099-C becomes taxable income on Form 1040 unless you can exclude it through Form 982.” 
– Gary Bode, cancelled debt CPA accountant

Form 1099-C battle strategies

The IRS assumes tax Form 1099-C is correct. But sometimes it’s not.

  • Sometimes the date is wrong. That can be a big deal if you’re using the insolvency provision of Form 982. The IRS insolvency calculation takes place just before the debt is forgiven. If the date is wrong, and you have less insolvency on the date on Form 1099-C, you’ll pay more tax. Try getting the bank to correct Form 1099-C. Or your cancelled debt CPA can make a case for the date change using documentation and explanations.
  • When a Form 1099-C arises from some property seizure, it reports the fair market value of the property. Sometimes that amount is incorrect; it’s an educated estimate at best. If you can track what the property sold for at auction, and that figure works to your advantage on IRS Form 982, try getting the bank to correct Form 1099-C.
  • Sometimes the 1099-C gets issued to the wrong person. When the bank won’t help, your cancelled debt tax preparer can take the case to the IRS.
  • Form 1099-C timing. Sometimes the Client can control the timing of Form 1099-C. I’ve had clients who delayed 1099-C issuance to the 2014 tax year. Sometimes planning makes a difference.

Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment), battle strategies

Form 982 has multiple provisions to exclude debt cancellation from taxable income on Form 982. Insolvency is the best known tactic. Sometimes I use more than one provision of Form 982.

“Never pay income tax on cancelled debt from Form 1099-C without exploiting every possible provision on Form 982.”
– Gary Bode, cancelled debt CPA accountant

Battle plan for gains and losses generated from property seizures on Form 1099-C

When cancelled debt arises from seized property, there’s a reportable “sale” per IRS requirements. Use Form 4797. I’ve seen folks incorrectly using Schedule D of Form 1040. I come across this issue most often with rental property short sales and foreclosures. The calculation is complex and factors in the original cost of the property, accumulated depreciation, unclaimed rental losses in prior years and the sales price.

The tax attributes reduction part of Form 982

Can the IRS instructions for Form 982 be more obscure? Exclusion of cancelled debt from taxable income, Form 1099-C to Form 982 to Form 1040,  isn’t always a free ride with the IRS. Sometimes the tax just gets shunted to a future tax year when you dispose of other assets. Again, planning is prudent.

I’m a cancelled debt CPA with a virtual office. Distance between us isn’t a factor. Form 982 is convoluted and confusing. Honestly I’ve had over two dozen calls so far from other tax preparers asking questions about the cancelled debt battle, some of them CPAs. If you like what you read in the posts and testimonials give us a call for a free cancelled debt consultation. (910) 399-2705.

“The reduction of tax attributes section of Form 982 is reason enough to hire a tax preparer experienced with cancelled debt and Form 982.”
– Gary Bode, Form 982 CPA

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