Cancellation of Debt CPA answers FAQs on Form 1099-C and Form 982

Cancellation of Debt CPAs field all sorts of Form 1099-C and IRS Form 982 questions. Cancellation of debt tax consequences often come as a surprise to a new Client. I’ll present a roundup of debt cancellation FAQs to perhaps help with the 2015 tax season.

Overview of cancellation of debt tax reporting rules

In this post I’m not dealing with S Corporation cancellation of debt, C Corporation cancellation of debt or Partnership cancelled debt. We handle Form 1099-C cases for these entities. But in this post I’m discussing Form 982’s impact on Form 1040.

• Taxpayer has cancellation of debt in 2014. See some examples below.
• The bank sends the taxpayer a Form 1099-C, Cancellation of Debt, in 2015.
• The amount of cancelled debt in Box 2 of Form 1099-C becomes taxable income. Ouch!
• Your cancellation of debt CPA excludes some or all the cancelled debt on Form 1099-C by using IRS Form 982, Reduction of Tax Attributes.

“Don’t pay any tax on a Form 1099-C without thoroughly exploiting every aspect of Form 982.”
- Gary Bode, cancellation of debt CPA

What is cancellation of debt?

Here are a few examples:

• You had a rental property foreclosure. The Fair Market Value of the rental real estate was $100,000. The landlord’s mortgage balance was $130,000. The bank “forgives” the entire $130,000 mortgage.
  • The landlord’s cancellation of debt is $30,000 (130,000 - 100,000).
• Credit card cancellation of debt. Your credit card balance is $50,000. The lender accepts $12,000 as payment in full.
  • Your cancellation of debt is $38,000 (50,000-12,000).
• Student loan cancelled debt. You become permanently disabled. You’re awarded debt cancellation of your student loans for $100,000.
  • Your cancellation of debt is $100,000.
• You negotiated a HAMP mortgage loan modification of $30,000.
  • The homeowner’s cancellation of debt is $30,000.
  • Typically HAMP spreads out the cancelled debt over three years.

“There’s a HAMP cancelled debt strategy if your mortgage modification occurred in 2010, 2011, 2012 or 2013. It allows full exclusion of the HAMP amount, usually with no future tax consequences.”
- Gary Bode, Form 1099-C CPA

Help for Form 1099-C, Cancellation of Debt, and Form 982, Reduction of tax attributes

• The Form 1099-C instructions aren’t for taxpayers.
• The Form 982 instructions might help.
• IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments, expands the Form 982 instructions.
• Tax databases. Cancellation of Debt CPAs use these tools because the tax database Folks condense and better explain tax issues better than the IRS.
• Other information on the IRS website.
• Cancellation of Debt CPAs. I offer a free consult.
• The IRS by phone.
• Tax books.
• Tax courses aimed at cancellation of debt CPA continuing professional education.
• Tax software.
• Internet. I really try to maintain a good cancelled debt blog. But my cancellation of debt posts usually cover only a few tax aspects at a time. Applying your specific circumstances still remains a challenge. And the Internet, including my blog, offers piecemeal advice, not a single comprehensive source.

“Some tax software handles cancellation of debt. However it may not handle Form 1099-C and Form 982 as automatically as it does for simple tax issues. Cancelled debt may require manual over rides.”
- Gary Bode, Form 982 CPA

Form 1099-C(s) don’t always arrive on time - amended tax returns

The IRS has lots of rules concerning when a bank issues a Form 1099-C. So they often arrive late. Sometimes years late. In 2014 we had maybe a dozen cases where our Client’s 2013 Form 1099-C arrived after the Client had filed the tax return. There were another few cases where the 1099-C was dated in a prior tax year. We also see cases where the taxpayer was only aware of a Form 1099-C when an IRS CP2000 Notice arrived, proposing taxes for a Form 1099-C the taxpayer never received.

I think every Cancellation of Debt CPA files amended tax returns to include the Form 1099-C and Form 982. But some of the IRS CP2000 cases don’t require an amended tax return.

“If you have cancelled debt, expect a Form 1099-C. Why? Banks have to use it as evidence of their bad debt tax deduction. You can pull an IRS transcript of what they have on you with their Get Transcript online tool.”
- Gary Bode, cancellation of debt CPA

Flow of Cancellation of Debt through the tax return

• Form 1099-C arrives.
  • If you had a cancellation of debt ,and didn’t receive a Form 1099-C, the IRS says you’re still required to report. it.
  • In many cases this works better for the taxpayer. Why? Generally Client’s finances improve after a Form 1099-C event. So if you File Form 982 in 2016, when the Form 1099-C arrives for a cancellation of debt in 2014, you may be less insolvent, meaning more of the cancelled debt in Box 2 of Form 1099-C becomes taxable income.
  • The discharge of qualified principal residence indebtedness exclusion isn’t available for 2014. So if a home mortgage 1099-C, dated in 2014 arrives for a 2013 HELOC, you’re better amending the 2013 tax return.
• The amount in Box 2 becomes taxable income, usually on line 21 of Form 1040.
• Your cancellation of debt CPA goes through behind the scenes calculations that vary widely depending on type of debt involved (student loan cancelled debt, credit card cancelled debt, HAMP cancelled debt, rental property foreclosure, primary residence short sale, etc.) and your particular circumstances.
• The amount of excludable cancelled debt goes on Form 982, Reduction of Tax Attributes.
• If all the cancelled debt is excluded, line 21 of Form 1040 is $0.
• If only part of the cancelled debt is excludable, only the non-excludable portion presents on line 21 of Form 1040.
• Reduction of tax attributes. Often the Form 982 isn’t always a free ride. How can you tell if a Cancellation of Debt CPA is skilled. S/he will ask questions in hopes of reducing adverse current and future tax consequences from Form 982. The IRS has complicated “ordering” rules where you must sometimes adversely adjust other parts of the current tax return and potential transactions on future tax returns.

“How much additional tax does cancellation of debt trigger? Figure 25-30% of the amount in Box 2 of Form 1099-C.”
- Gary Bode, cancellation of debt CPA

Form 982, Reduction of Tax Attributes

• The discharge of qualified principal residence indebtedness exclusion of Form 982 is gone for the 2015 tax season.
• It may be reinstated for 2014.
• There’s a HAMP cancelled debt tax strategy for agreements signed in 2010-2013.
• Insolvency. You should understand the IRS definition of insolvency for Form 982 calculations.
• Insolvency isn’t bankruptcy.
• Insolvency isn’t income related. I see plenty of well off Folks using insolvency to exclude the cancellation of debt for taxable income.

Do you need a cancellation of debt CPA?

Maybe. Tax software doesn’t handle cancelled debt automatically. The Form 982 instructions aren’t much help. The potential amount of additional tax is high. Other areas of the current tax return may be affected with Form 982. Future tax consequences are possible. Don’t have a Form 1099-C local CPA? Call me for a free consult at (910) 399-2705.

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