Cancellation of Debt CPA discusses challenging various aspects of Form 1099-C, Cancellation of Debt, with the IRS

Cancellation of debt CPAs often see IRS Form 1099-C (s), Cancellation of Debt, that don’t reflect the underlying cancelled debt transaction well. Sometimes I challenge an aspect of the Form 1099-C with the IRS to optimize my Client’s Form 982, Reduction of Tax Attributes.

Hi I’m Gary Bode, cancellation of debt CPA with lots of Form 982, Reduction of Tax Attributes, experience. Our virtual office means we can handle your cancelled debt tax returns wherever you live. I’ll cover my process for challenging aspects of Form 1099-C.

Is the Form 1099-C, Cancellation of Debt, actually your cancelled debt?

I’ve had a case where the bank issued Form 1099-C to the wrong person or business. Document your attempts to resolve this with the bank. The IRS accepted our explanation that the Form 1099-C got issued in error.

Start by seeing if the cancelled debt in Box 2 of Form 1099-C disappears with Form 982, Reduction of Tax Attributes

Challenging any part of Form 1099-C, Cancellation of Debt, is exhausting. The bank gives you the runaround and usually refuses to correct a Form 1099-C. The IRS thinks the information on Form 1099-C is accurate. If you can get past standing on principle, first check your tax position with the Form 1099-C as is. Remember that just excluding cancelled debt from taxable income is only part of the picture. In some cases the tax attributes of Form 982 mean you or company are just delaying the taxes on the cancelled debt until you sell another asset in the future.

“Check to see if filing Form 982, Reduction of Tax Attributes, using the Form 1099-C, Cancellation of Debt, as is solves the cancelled debt problem with no tax consequence.”
- Gary Bode, cancellation of debt CPA

Challenging the date on Form 1099-C, Cancellation of Debt, and the IRS Insolvency Worksheet - Insolvency on Form 982

The insolvency provision of Form 982 in date dependent. If the identifiable date that triggered a Form 1099-C is say February 1st, 2014, but the 2014 Form 1099-C shows December 31st, 2014, you’re generally stuck with that date. In my experience with the IRS Insolvency Worksheet, most folks are better off financially 10 months after settling cancelled debt. Which means they may not exclude as much cancelled debt using December 31st, 2014 date compared to February 1st, 2014. Again, prepare an IRS Insolvency Worksheet for each date. If there aren’t any real tax consequences to using December 3st, it’s easier just to ride with that date.

The bank shouldn’t really care about this issue because they still use Box 2 of Form 1099-C to justify their own bad debt expense on their tax returns and Financial Statements. None the less, they generally won’t change the Form 1099-C date. The IRS has guidelines for issuing Form 1099-C. Sometimes, with the right documentation and an understanding of the IRS guidelines, you can make a case to the IRS for a better Form 1099-C date.

“Provide a concise explanation, including documentation of why the date on your IRS Insolvency Worksheet is “better” than the identifiable date on Form 1099-C.”
- Gary Bode, cancellation of debt CPA

Battling the amount in Box 2 of Form 1099-C, Cancellation of Debt, is possible

But the banks add so many fees and provide so little documentation that its hard to reconcile and find the correct amount. So my fees aren’t as cost efficient.

Find me on Google+

Like me on Facebook