Form 1099-C CPA tax accountant discusses the IRS Form 982 instructions

As a Form 1099-C CPA, I handle calls from Folks trying to fill out Form 982. Most of them express frustration over the Form 982 instructions. There’s five pages of instructions included with Form 982. The Form 982 instructions state the estimated tax preparation time is about five hours. Ouch.

I also handle S Corporation cancelled debt, Partnership cancelled debt and C Corporation debt. Most of my comments on the Form 982 instructions apply to the Form 1120S instructions, Form 1065 instructions and Form 1120 S instructions too. But in this post I’m commenting on Schedule E cancelled debt, Schedule C cancelled debt and personal cancelled debt.

What is a Form 1099-C?

Form 1099-C, Cancellation of Debt, is a tax document a lender sends to the taxpayer and IRS when some type of debt forgiveness occurs. Sorta-kinda like a Form 1099-MISC since it reports income to the IRS. Form 1099-C, Cancellation of Debt, reports the amount of debt forgiveness, the date of debt forgiveness and the Fair Market Value of the asset, like say a car’s blue book value when the car got repossessed. Fair Market Value doesn’t apply to cancelled credit debt or cancelled student loan debt. Form 1099-C also states whether you are personally responsible for the cancelled debt. Here are a few examples:

• You had a rental real estate property foreclosure in 2014.
  • The rental property sold for $100,000 at the Sheriff’s auction.
  • Your mortgage balance was $125,000.
  • If the bank forgives the remaining $25,000, that $25,000 becomes foreclosure cancelled debt.
  • You receive, eventually, a Form 1099-C with $25,000 in box 2.
    • Why is a Form 1099-C inevitable? The bank includes cancelled debt as a tax deduction on its own tax return.
• You settled a $30,000 credit card balance for $12,000 in 2014. The remaining $18,000 is cancelled credit card debt. You’ll eventually receive a Form 1099-C for $18,000.
• You worked out a loan modification on your home’s mortgage.

Don’t expect any help from the Form 1099-C instructions; they’re intended for the bank not the taxpayer.

“Form 982 is the only way to exclude cancelled debt on Form 1099-C from taxable income. There’s just a ton of Folks who didn’t about Form 982 and paid taxes on the Form 1099-C cancelled debt income. You can amend earlier returns to include Form 982.”
- Gary Bode, Form 1099-C CPA tax accountant

Timing of the 1099-C

As a Form 1099-C CPA, I have Clients where the Form 1099-C arrives after the original 2014 tax return got filed. Sometimes the Form 1099-C arrives years late. The IRS has a slew of triggering events for Form 1099-C issuance. I spoke to another Form 1099-C CPA and he has a case where it came 10 years late.

How to handle a late 1099-C?

Circumstances vary. But let’s say you negotiated a rental property short sale in late 2014. So there are formal documents dated in 2014. So sometimes the info below isn’t relevant. You should expect a Form 1099-C in 2015. If the bank doesn’t actually send the Form 1099-C, say until 2016, should you still claim the rental property cancelled debt in 2014? Yes. Why? Well the IRS says so, but that’s not the main reason. If I need the insolvency provision of Form 982 to negate the entire amount cancelled debt in box 2 of Form 1099-C, you were probably more insolvent when the rental property short sale occurred than you are in 2015. So sometimes we proceed with Form 982 without the Form 1099-C if we’re sure the actual copy isn’t available.

“If you have a cancelled debt transaction expect a Form 1099-C. Call the bank. Or extend your 2014 tax return and pull your IRS info when it’s available.”
- Gary Bode, Form 1099-C CPA

Can the bank still hassle me on collecting the debt after generating Form 1099-C?

Yes. I see that sometimes. I’ve heard other Form 1099-C CPAs say it happens occasionally too. My guess? The bank write off all the debt and they’re trying to collect the unforgiven balance.

So what isn’t in the IRS Form 982 instructions?

Well, lot’s of things. As with most IRS instructions you have to be tax savvy in other areas beyond the Form 982 instructions. Let’s discuss a rental real estate foreclosure as an example. The rental property foreclosure is a “sale” to the IRS. So there’s a few things you need to do besides submit Form 982:

• You calculate the gain or loss on rental property foreclosures on IRS Form 4797. The Form 4797 instructions make the Form 982 instructions seem like a children’s book.
  • You need to prepare the final Schedule E, or Form 8825 if you’re an S Corporation or Partnership.
  • You want the original purchase HUD statement. Why. Most landlords don’t understand the buyer’s settlement charges get added to the rental property purchase price.
  • The Fair Market Value for the rental property on the date of disclosure appears on Form 1099-C.
    • We routinely look to see what the bank sold it for. Why? That’s usually better number for the landlord.
  • You must recapture depreciation in the calculation. You won’t find help for this in the IRS instructions for Form 982.
    • If you haven’t claimed depreciation on the rental property you still must include depreciation expense that could have been deducted over the years as part of the Form 4797 calculation.
    • Sometimes your Form 1099-C CPA can circumvent that with Form 3115 allowing you to expense all the rental property’s depreciation in the year of sale while recapturing it for Form 4794. Nice tax loophole when you can use it.
  • You need to calculate how much cancelled debt you can exclude.
  • You need to calculate how mush cancelled debt you have to include as taxable income.
  • You need to prepare Form 982.
  • You need to prepare a Schedule how you applied the reduction of tax attributes component of Form 982, if any.
• How to handle the reduction of tax attributes associated with Form 982. Please read below for more info.

So what is in the Form 982 instructions?

Too much information, making what you actually need harder to find. I read the Form 982 instructions every year. There’s usually no surprise because I monitor Form 982 emerging and twilighting issues year round. I also take a few cancelled Continuing Professional Education courses on cancelled debt every year But most Form 1099-C CPA tax accountants rely on subscription databases that better present the IRS tax reporting requirements for cancelled debt.

So where are the true IRS Form 982 instructions?

Look at Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments.

Common FAQs with the Form 982 instructions:

• The insolvency provision of Form 982, Reduction of Tax Attributesis based on the value of what you own and the amount of debt you owe.
  • Rich folks successfully use Form 982 to exclude cancelled debt from taxable income.
• If you’re claiming insolvency on Form 982 you have to include the IRS cancelled debt worksheet with the return.
• Can I use more than one provision of Form 982 instead of just insolvency. Yes. We often use more than one provision to exclude cancelled debt from taxable income.
• My tax software doesn’t help with cancelled debt. Some programs don’t. But there’s usually a manual workaround if you know what you’re doing. I think Clients mean their tax software doesn’t handle cancelled debt as easily as a Schedule C or Schedule E.

How can I tell if I have a good Form 1099-C CPA tax accountant?

S/he will look at future tax consequences of using Form 982 for the 2015 tax season. Why? The reduction of tax attributes components of Form 982 aren’t always a free ride. Sometimes you have to reduce the purchase price of other assets. So you’ll have more gain or less loss when you sell the asset giving the IRS another swipe of collecting tax initially circumvented on Form 982. Let’s say that comes down to lowering the purchase price of a rental property or your home. When you sell your home there’s currently a $500,000 exclusion on capital gains from the sale of a primary residence. So it makes more sense, under current tax reporting regulations, to adjust the purchase price of your home.

Why are there so few Form 1099-C CPAs?

Well cancelled debt tax reporting is complex and brick and mortar CPAs draw from local geographical areas. There’s usually not enough cancelled tax cases to make it feasible for the CPA to learn about them. I draw from a national audience and I spent a lot of time researching cancelled debt tax reporting to become a Form 1099-C CPA.

Do I need a Form 1099-C CPA?

It depends. I certainly get new Clients who self prepared Form 982 and the IRS didn’t like it. I prepare cancelled debt tax returns for CPAs and even tax attorneys. There’s even a CPA testimonial on this website. Yes, it can be that complex. You have to ask yourself if you truly understand the Form 982 instructions. The amount of potential additional tax can be 25-30% of what’s showing in box 2 of Form 1099-C. Ouch. While it’s a “soft” issue, the emotional trauma of dealing the bank, attorneys, etc. makes Form 982 seem like an IRS left hook to the jaw. Sometimes you just get emotionally drained over cancelled debt. I offer a free phone consult. (910) 399-2705. Why? Sometimes I can solve a problem for the caller but some of those calls end up with me preparing the cancelled debt tax return.

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