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.
I received several 1099-Cs, which I understand. However the date of the identifiable event is 6 months later than the letter sent to me at the time of the paid settlement. The date on the 1099-C doesn’t make me necessarily insolvent as I was at the time of settlement. Any recourse?
Hi Gina, common problem. We sometimes build a case for using a better dat. Sounds like you can do that if I understand the question correctly. Hope that helps.
I received a 1099-C. I was co-signer on my son’s school loans. He fail to pay them. I offer to make a payment of $200 a month and they declined. Can I claim insolvency
Only if your son or yourself receive a Form 1099-C. But then you could claim insolvency. It also seems to me that some tax positioning stragies are available to lowe or eliminate your cancelled debt tax burden. Hope that helped.
We had a 80/20 mortgage. Defaulted on both the first and the second. The second I received a letter that the bank closed the account with no deficiency owed. Oh that was a relief. We did the short sale on the first. Now I got a 1099-C for the second $45,714.00 that was discharged. So my question is this:
I was in foreclosure for 6 years. Had a divorce, had open heart surgery (twice ’11 and ’12) lost my job. Couldn’t get unemployment as you have to be able to go to work so essentially I was screwed. I certainly was insolvent. But because the house was sold as a result of a foreclosure action with no deficiency balance do I still have to report it. The way I read the code it says no. Second opinion? I had no taxable income otherwise.
Hi Ray, yes the IRS will consider the Form 1099-C, Cancellation of Debt, as income.
Did I read where I need to fill out a 982 for every 1099-C? My 1099s are in different moths since i paid lump sum settlements.
Nope, just one 982 Gina
I had a auto loan with Ally bank. I did a smart buy with them my lease turned into a loan after 3 years of paying on time payments I continued making payments for the last 4 years on time! when they redid the loan I guess I would be paying another 5 years. well I received a letter from Ally with a 1099 c included that the government stepped in and they were not allowed to be charging that high APR and my car is paid off and they are forgiving the debt by their negligence. my tax lady is saying we have to claim that as income. I am not satisfied with that answer. can you help?
We spoke today Denise. That’s a unique scenario. As I mentioned we can probably get rid of the cancelled debt but not the Form 1099-MISC.
When preparing an insolvency worksheet it indicates to put the “amount owed immediately before the cancellation”. Does that me you can include the amount of the debt which was cancelled as part of your liabilities?
Yep Len
I received a 1099-C after I filed and received my refund so I know I need to amend my 2014 return and do a 982. I want to claim insolvency but how does a house mortgage come into play? Do I claim FMV of the home, or just the equity I have in it? Does the full remaining amount of the loan count as debt? In terms of personal assets…is it really just a fair estimate of what your stuff is valued at?
House FMV goes on the assets, mortgage in the liabilities, Hope that helped.
Gary,
I received a 1099-c for a second mortgage on our house. We filed chapter 7 in 2008 and this was included in the bankruptcy. However, they placed a lien against our home. I called and they agreed to settle for $1500. The 1099-c is for over $14000. How should I report this on form 982? We are upside down in our home and vehicles and I have an almost $5000 judgement against me for not repaying a long term disability insurance claim from an illness and subsequent total disability. Both my husband and I are totally disabled. Although we file a joint return the 1099-c is only in my name. We also received two 1099-a forms for two timeshares that we let go back due to our financial situation. How do I report these? I believe we are insolvent but don’t know what I need to do to prove it. Thank you!
Hi Kim. If the 2nd mortgage was used to purchase or improve the house use the qualified mortgage discharge of Form 982.
My student loans were forgiven due to my disability. I am now living on social security disability income. My student loans forgiven, according to the 1099C is $161.197.22. It is now considered taxable income. Even if the taxes are at 30% there is no way I can pay over $50.000 in taxes on my income. I have downloaded the form 982 with the advice of my cousin who happens to be a lawyer. I contacted him in hopes he could set me up with a tax lawyer but he told me I did not need a lawyer but to get a CPA and form 982. So far locally, no CPA is willing to assist me so I am stuck. Please help me understand how to fill out this 982 form. I completed the insolvency worksheet which showed I am insolvent by $122,972.44. I am not a business nor do I have business assets.
Give me a call on Monday Josephine. In my experience most disabled folks can exclude all the cancelled student loan debt. Try not to worry.
Ok, I will call Monday, thank you.
Josephine
My spouse received a 1099-C due to his disability on a parent plus student loan for $116,000. We are still in the 3 waiting period to have the loan totally forgiven. How does the debt forgiveness act of 2014 work on my favor this year or would I be better off ignoring it this year and filing an amended return in a future year.
Sorry to hear that spouse is disabled. You have to deal with the IRS Form 1099-C, Cancellation of Debt, by paying taxes on the $116K or using Form 982 to reduce ore obliterate the $116,000. We’d be happy to prepare that return for you.
Hi gary,
I had a rental property that I allowed the bank to repossess with a deed in lieu transaction. My 1099-C shows the “debt discharged” amount as the full amount that I owed on the mortgage. Box 7 shows the FMV as $99,000. Does the mean the bank has not sold my property yet and they are saying that the full remaining mortgage amount was discharged, not the difference in what I owed and what they sold it for?
I tried completing Form 982, but because this was a rental property, do I have to complete Form 4797 also? I am claiming insolvency because I did not have a business, just a home that I converted into a rental property for 2 yrs.
Thanks
Well Jarod they probably have sold it. I suggest you go to the courthouse to what it sold for, I wouldn’t take box 7 as Gospel. With rental property cancelled debt the two applicable exclusion general exclude the IRS tax Form 1099-C, Cancellation of Debt, from becoming taxable. You prepare a final Schedule E, Form 4797, perhaps an insolvency works sheet, Form 982 and reduce your tax attributes. We’d love to help you with that return. 910 399-2705.
Hi Gary,
I can’t tell you how glad I am that I found this site. I just received a notice from the IRS regarding a cancellation of debt from 2013. I found the form and the worksheet online, but I’m a little confused on how to fill out the form. The notice states that I don’t need to file an amended return because they already have the information, but the original income that they have doesn’t look correct to me and I know I’ll be sending back the form and the worksheet. I just as soon as avoid any future problems if possible. Any advice you could give would be greatly appreciated.
Well Victoria, they probably will take a closer look at that return. I’d make sure their numbers are correct as they make mistakes too. If that’s the case we’d file an amended return.
Reading more….I think I have it wrong. I think I need to put the amount from line 2 in 10a.