Cancelled Debt CPA discusses the 2014 Form 1099-C issues for the tax season

Cancelled Debt CPAs don’t really finish on October 15th, the last date for extended tax return submission, like most tax CPAs do. Why? Lots of Form 1099-C Clients have to amend their current year tax returns and/or prior year tax returns. IRS tax Form 1099-C, Cancellation of Debt, often arrives late. Sometimes years late. Some Clients never receive the Form 1099-C because they moved. Unfortunately the IRS doesn’t move and their copy of Form 1099-C always arrives. Often a new debt cancellation Client calls when the IRS sends Notice CP2000 “proposing” additional tax on the amount in Box 2 of the Form 1099-C they never received. Sometimes cancelled debt CPAs amend the tax return in question to include Form 1099-C and Form 982, Reduction of Tax Attributes. Form 982 is the only way to excluded cancelled debt from Form 1099-C from taxable income.

Incorrect Handling of Cancelled Debt

We get calls almost daily from CPA tax accountants, lawyers, enrolled agents, H&R Block employees, etc., asking for help with Form 1099-C, Form 982 and cancelled debt in general. I’m not implying these Folks file inaccurate returns. I was just some part of their research process. Along with feedback I get from potential clients, this implies cancelled debt tax reporting is murky at best. The Form 982 instructions don’t really help, in my opinion. The Form 1099-C instructions are for the lenders and Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments, is incomplete (it sometimes requires other IRS instructions beside Form 4681).

In 2013 I saw three cases where the Client’s original cancelled debt was denied exclusion from taxable income because the cancelled debt tax reporting logistics weren’t followed. The Clients then jumped through tax reporting hoops with me to arrive at the same amount of $0 tax due.

No receipt of Form 1099-C

I didn’t track the number of these cases. But it’s common for Folks to call when the IRS receives a Form 1099-C that wasn’t listed on the Client’s tax return. Some types of debt, like primary residence short sales, mean the taxpayer moves and the Form 1099-C becomes undeliverable.

I recommend checking your IRS info. Their online tool, Get Transcript, may help ascertain what the IRS has on record for your by tax year. Typically 2014 tax info becomes available after April 2015. So filing an extension is prudent. The Get Transcript isn’t perfect. Many Clients tell me that the IRS says the Client isn’t the Client after completing the registration process.

Calls for Documentation

Sometimes the IRS asks for some cancelled debt documentation, usually when the insolvency exclusion of Form 982 is used. Some categories on the IRS insolvency worksheet found in Publication 4681 require estimates. Like, say, the Fair Market Value of your tools. But other categories, like say cash in the bank on the Form 1099-C date should have documentation.

I recommend having documentation for everything. Why? It’s easier to track all that paperwork now. It might not be available in 2016 if/when the IRS asks for it.

I had one Client drop my services because I wanted documentation for key issues. He paid me. He thanked me. He assured me he had all the documentation. I suspect he did the return himself using numbers from his memory. I don’t work for the IRS but my guess he had a higher chance of an audit for various reasons, so pulling numbers for the discharge of qualified real property business indebtedness and insolvency exclusions on Form 982 was dicey.

Erroneous Advice

Every cancelled debt CPA gets a few Clients who really enjoy the tax preparation process. So they read up on various cancelled debt issues and challenge me to prove the “advice” is right or wrong. Sometimes it’s not really the “advice,” it’s the interpretation. Most CPAs use some tax research database for information. Even my website has disclaimers on it, despite my best attempts at accuracy. No post is comprehensive for Form 1099-C issues. It can’t be. And piecemeal information is dangerous.

Go to your local University. They may subscribe to a tax database. My local university does and I used it for about five years before my time became too valuable. Your local library may have a current US Tax Masters Guide. I keep one for reference. You local bookstore has reliable books for tax information. Be sure it’s for the current tax year. Things change fast.

The changing nature of cancelled debt for 2015

I got at least 40 calls this year asking for help for their 2014 tax return. Most of these were for primary residence short sales and HAMP cancelled debt. The discharge of qualified principal residence indebtedness exclusion of Form 982 is gone for 2014. So the almost automatic exclusion for home mortgage cancelled debt isn’t available, although Congress could reinstate it. The IRS insolvency worksheet has some dicey issues. Some home mortgage cancelled debt tax positioning is possible.

But there were enough rental property foreclosure calls to make think that although the economy is better. there’s still fallout from the Recession.

Psychological aspects of Form 1099-C, Form 982 and cancelled debt

Most cancelled debt tax cases are the end game for protracted financial problems and years of dealing with banks, bankruptcy attorneys. etc. Cancelled debt Folks go through the wringer. It doesn’t sound very CPAish but I keep a sign on the wall that reminds me Form 1099-C Clients are stressed. It costs me nothing to be aware of that fact. A few of my testimonials allude to this issue.

Free consult for cancelled debt

If you don’t have a local cancelled debt CPA I offer a free consult on Form 1099-C, Form 982, etc. I try to be helpful. I don’t hard sell cancelled debt services. Paradoxically the more helpful I am the more often a Client realizes self preparation of Form 982 isn’t prudent. It’s not rocket science but it’s tricky without some experience. Some callers expect me to do their tax return by phone. Some want to double-check what their CPA is doing. But if you want a free consult call (910) 399-2705.