Use Form 1040-X with Form 982 to amend a prior tax return for a late arriving Form 1099-C. Never pay taxes on cancelled debt without thoroughly exploring all the Form 982 exceptions and exclusions. (910) 399-2705.
Form 982 CPAs saw many Form 1099-C(s) and Form 1099-A(s) arrive late in the 2013 tax season. If you receive a late or corrected 1099-C after filing, you need to amend the original return by filing Form 1040-X and Form 982. Form 982 may allow exclusion of the cancelled debt from taxable income. If the 1099-C or 1099-A reports Corporate or Partnership cancelled debt, you’d have to amend the Form 1120, Form 1120-S or Form 1065. But we’ll stick with Form 1040-X in this post. In this case, Form 1040-X reports tax return changes secondary to inclusion of Form 982, usually using the Insolvency and/or the Qualified Real Property Debt exclusions of Form 982. I’ll explain how a Form 982 CPA might approach amending a tax return to include cancelled debt.
Five common scenarios for amended tax returns (1040-X) we’ve seen in the last several years with 1099-C and 1099-A:
- Folks got the Form 1099-C, self prepared their 2012 tax return and paid taxes on the cancelled debt. They later realize there’s a Form 982 tax loophole and then want to amend 2012 with Form 1040-X and Form 982.
- Folks received a Form 1099-A. The bank continues collection attempts. Form 1099-C arrives in a future tax year. Which shouldn’t be a surprise, but often is.
- The 1099-C or Form 1099-A arrives late, after filing 2012. Again you’d amend the 2012 return with Form 1040-X and Form 982.
- The IRS sends you a tax audit Notice or Letter stating they received a Form 1099-A or Form 1099-C for 2012 and now wants more tax, penalties and interest. Again you’d amend 2012 with Form 1040-X and Form 982.
- The IRS sends a Notice stating they’ve received a Form 1099-S which reports the sale price of a property you owned. Of course they’d like to tax you on the full amount. Pull your IRS transcript if the sale was a foreclosure or short sale. Why? A form 1099-C is probably lurking there too, even though the IRS isn’t auditing you for the Form 1099-C, yet. And yes they don’t always catch both issues together.
The moral of the story? Anticipate Form 1099-A or 1099-C. If it doesn’t arrive, ask about it.
“When we amend a self prepared Form 1040 to include Form 982, we look for other unclaimed legitimated deductions and tax credits. For example, with rental property there can be an ordinary loss on the “sale” that can offset current and/or future tax liability.”
- Gary Bode Form 982 CPA and tax accountant
Step by Step Cancelled Debt, Insolvency, Qualified Real Property Business Debt exclusion and Form 1040-X and Form 982: Overview
Cancelled Debt – Form 1099-C
If your rental property was foreclosed, abandoned or short sold;
- The bank may issue a Form 1099-A when the property changes hands.
- The bank sells the property and applies the proceeds to the first and/or second mortgage.
- After exhausting collection attempts, the bank eventually cancels or “forgives” the remaining loan balance and issues Form 1099-C.
- The cancelled debt on Form 1099-C becomes taxable income unless you can exclude it through Form 982.
Other examples of cancelled debt include; cancelled credit card debt, foreclosure on your residence, short sales, mortgage loan modifications, car repo(s), deed in lieu of foreclosure etc.
Cancelled Debt and Form 982
Cancelled debt from Form 1099-C becomes taxable income. For a rule of thumb, figure you’ll pay taxes of about 25%-30% of the cancelled debt amount (ouch), unless you can exclude it using one or more Form 982 strategies. I’ve only seen one case where we couldn’t exclude at least some of the cancelled debt. I think many folks just don’t know about Form 982. The most common Form 982 scenarios are the Insolvency and Qualified Real Property Business Debt exclusions.
“Don’t pay taxes on cancelled debt without exhausting all the possibilities on Form 982 to exclude it.”
How CPAs work the Insolvency Issue on Form 982
Insolvency CPAs:
- First check Form 1099-C for accuracy. Sometimes the date is wrong. If your car was repo(ed) on June, the 1099-C may still list the cancellation date as 12/31. By then, you may have made some financial headway. However in June, you were in dire financial shape and could exclude all the cancelled debt through Form 982.
- Sometimes the cancelled debt amount on 1099-C is wrong. Banks make mistakes.
- The Fair Market Value on Form 1099-A and/or 1099-C is almost always wrong. Here we get an appraisal or other documentation to prove the true Fair Market Value to the IRS.
- Next we gather information from you about your financial condition ias of June 1st.
“Remember Insolvency is only one of the conduits available to exclude cancelled debt on Form 982.”
Insolvency CPA Planning
Another scenario is proactive planning to maximize insolvency, perhaps coordinating multiple lenders. This sounds unethical, but some folks don’t want bankruptcy on their credit report. Insolvency CPAs can help position you, given enough time, to maximize the taxable income exclusion on Form 982.
Amending the First Return to Include Form 982 via Form 1040-X
CPAs amend prior returns on a regular basis. For lots of reasons. An Insolvency CPA:
- Starts with the original tax return.
- We look at what the IRS thinks is wrong with it.
- CPAs listen to the Client’s perspective on the tax issues.
- CPAs determine what the Client’s tax position could be.
- CPAs determine what the Client’s tax position should be.
- We review Form 1099-C for accuracy. The bank has to revise Form 1099-C if we can prove it is inaccurate.
- CPAs then fill out Form 982, using the insolvency calculation and/or other Form 982 conduits.
- Finally we prepare an amended return using Form 1040-X, including Form 982, and carefully explain to the IRS why the amended version is correct.
Other Sources of Information on Form 982 and Cancelled debt
- IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments.
- Form 982 Instructions.
- Our website. Click on 982 in the forms list in the left sidebar.
- Our website. Click on 1099-C in the left sidebar.
Please note Form 982 is complex and the insolvency issue is only one aspect of it. You can’t rely on our posts alone for self preparation. Why? Not because we’re giving you bad information. But because your particular circumstances must be considered. Read the disclaimers please.
For a free initial phone consult at (910) 399-2705. Our virtual office means distance isn’t a factor in dealing with us.
After reading the information provided with the form 982 I am a little confused. If I already filed my return but need to amend it with a form 982, do I need to do it within 6 months of the original filing?
I’ve E Mailed you privately Mary Rose.
The AARP prepared my return in April, 2013 with no 982 being attached , and now I received a letter from the IRS intent to levy by Aug 22, 2013. Please help… Thank you
I’ve sent you a private e-mail.
After 3.5 years of being discharged of indebtedness, I received a 1099-C (account type: debt forgiven) from a loan company today. My lawyer stated to fill out the form 982 and wrote on the 1099, “TAX FORM 982-TAX ATTRIBUTES DUE TO DISCHARGE OF INDEBTNESS”, stating that I do not claim the debt cancelled as the bank/company says I should. After reading your article, I FINALLY have something to go by to understand this. But… do I do the same for state (NC)?
I live in Georgia, and this has happened to me. We filed at the end of January and by the end of July I need to have the amendment done. What is the best way to get this done, and how much will it cost? I am currently unemployed and my family is destitute living with in-laws. Any advice would be appreciated.
I’m sorry to hear of your troubles Benjamin. We amend tax returns and serve Georgia clients. Typically we first re-create your origninal return, change the return to reflect the new situation and explain it the the IRS and GA. Price depends on the complexity of the return. Also on the amount of work needed to prove insovency to the IRS. Hope that helps.
Filed tax return for 2011. In 2013 received a 1099 filed by a bank for tax year 2011 indicating the write off of a car loan. Now completing form 982 for insolvency, as that applies under according to IRS. Need to amend 2011 year tax return. However, does the amended tax return use the amount written off as part of “taxable income” on the form, or just file an amended return exactly like it was, but attach the 982 form with it to show the income was reported but is not owed due to insolvency?
Well I’m sorry you’re having that problems. You’d create another return complet with Form 982. Glad to hear you can that cancelleation of debt becoming taxable income. You’d also include Form 1040-X.
Am anticipating possibly multiple 1099Cs this year or over the next few.
I am 100% insolvent hanging on by my teeth since 2008.
For reasons I cannot explain here my tax return will be prepared by someone and mailed and they will have no knowledge of the 1099 C issue. I have no choice in this.
I will need to file amended if they come.
Are you able to work with people in PA?
If so I will email you the specifics and perhaps we can talk about anticipated charges….
If you cannot work or advise me in PA how would I find someone who could? I have been reading #4681 and #982 and I cannot make out anything that makes sense to me.
I sent you an e-mail Nora.
I am in NC. I self filed my 2012 taxes the first of Feb 2012. I rec’d a 1099-C from my ex-husband in March. I did an amendment (1040X) but never filed it. I received refunds from both state and federal for 2012 (I always elect to pay in more than I should for this reason). The 1099-C is from a voluntary repossession of a vehicle. I have printed my amended return and I have a blank form 982 staring at me…I have no idea what I am supposed to do with it. I am all for doing it myself, but have no idea where to begin or how to submit. I read in the instructions for form 982 that there is like a 6 month window to file for insolvency? I went to H and R Block to speak with a prep lady there and she gave me a worksheet (no IRS # code), just a plain jane worksheet to list my asset and liabilities for the day before the cancellation of debt, which was 12/30/12. According to the worksheet my liabilities (debts) such as credit card debt, car and other vehicle loans (including the repo), intrest, judgement, etc was $14,700. My assets such as cash, computers, cars, clothing, tools, jewelry, etc was $10,785.00. The amount of insolvency comes to $3915.00 if I figured correctly. How do I transfer this information to the form 982, and do I need to “re-amend” my 2012 form to reflect a reduction by $3915.00? Any help would be greatly appreciated.
I’d like to add that I’ve just found out that the “insolvency worksheet” the lady at H&R Block gave me is the IRS form 4681 and I have completed it.
Hi Sherri. Well, the IRS Insolvency Worksheet is a nice start. You’ll see lots of comments from tax preparers on this website, including CPAs. So, my impression is that most tax preparers don’t have much experience with Form 982. I would be hesitant to use H&R Block. The tax chains are fine for most personal tax issues perhaps. Your comment seems to be asking me how to prepare your tax return which is outside the scope of a comment. Even if you don’t utilize our services, please find someone who has done a bunch of Form 982 returns. Sorry, I can’t be much more help unless you become a client.
Hi Gary. I have the same concern as Rose, the first commenter above.
We did our own return for 2013 and included a 1099-C from our mortgage lender (approx. $24,000) in income on Line 21. For 2014 we used a tax preparer. When he saw our 2013 return he did an amendment that included form 982. Now the IRS is telling us we can’t exclude the amount because we didn’t file the 982 in a timely manner.
Looking at the instructions to the 982, it seems to us that the time limit of six months only applies to people who use the Qualified Real Property Business exclusion and have to use the excluded amount to reduce the basis of business property. Although we have claimed some depreciation on our house in the past (we once rented a room and my wife did childcare at home), we haven’t claimed any depreciation for a couple of years. On the amended return our preparer used the Principal Residence exclusion.
It does not seem right to us that the IRS can deny us the relief afforded by the Mortgage Forgiveness Act on a technicality. We would appreciate your thoughts on the subject. Thanks.
I think you are correct. If rental was incidental you should still be able to exclude qualified mortgage interest. Hope that helps Richard.