Form 982 CPA explains Form 1099-C and Form 1099-A | Insolvency and Cancelled Debt

As a Form 982 CPA, I often speak with folks who plan to self-prepare their tax returns. But about half of my cancelled debt cases involve amending a previous return prepared by the client. Form 982 issues get complex fast.

So here are some suggestions if you self-prepare Form 982.

Typical Cancelled Scenario with Form 1099-C, Form 982 and Insolvency

• Your credit card company writes off $5,000. The $5,000 is cancelled debt.
• The credit card company sends both you and the IRS a Form 1099-C.
• The IRS assumes the Form 1099-C is correct
• Form 1099-C helps the bank reconcile their bad debt expense on its tax return. That’s why I always assume they’ll issue Form 1099-C, eventually anyway.
• The $5000 becomes taxable income , ouch.
• You try to exclude cancelled from taxable income through Form 982. In this case you’d probably use the Insolvency component of Form 982.
• Cancelled debt appears on Line 21 of Form 1040.

Here are a few earlier posting on cancelled debt, insolvency, Form 982, Form 1099-C and Form 1099-A

Remember each cancelled debt case is unique. These posts are generic and don’t factor in your specific fact pattern.

• Rental Property Short Sale and Form 1099-A .
• Credit card cancelled debt and insolvency .
• Cancelled debt foreclosure and capital gains on rental property.
• Cancelled debt exclusion process on Form 982.
• Overview of cancelled debt and Insolvency on Form 982.
• Cancelled debt and short sales.

Factors to Consider for Self Preparation of Form 982

• Read over the instructions for Form 982. Read the associated IRS Publications. They give good examples.
• Don’t go to a tax chain. Their preparers rely solely on the software. You’re better off doing it yourself with Turbo Tax.
• A rule of thumb? Estimate the additional tax due as 30% of the cancelled debt. The additional potential tax liability with cancelled debt is significant.
• Remember the IRS often has different definitions for common financial terms e.g. insolvency.
• Anticipate the arrival of Form 1099-C and Form 1099-A. Don’t assume it wasn’t sent. Otherwise you’ll receive an IRS Notice CP 2000 or IRS Letter 566 months, or even years, later. Ouch.
• Don’t assume the Form 1099-C is correct. One example; credit card companies sometimes list the date of cancellation as 12/31. If the debt was cancelled in February, your financial position hopefully improved by 12/31. If so, the insolvency aspect of Form 982 excludes less cancelled debt.
• Never assume you can’t exclude cancelled debt on Form 982. Try another approach. Sometimes clients qualify through multiple provisions of Form 982.
• If you’re amending a prior return, pull your IRS file to see what info they have on you.
• With short sales and foreclosures, remember you have a capital gains transaction in addition to the cancelled debt.
• The IRS assumes the cancelled debt is taxable income. You must prove it qualifies to be excluded through Form 982.
• Assume you will be audited. Organize your records such that you can support every figure on Form 982.
• The IRS is skeptical about Form 982. We generally provide clear and concise explanations along with supporting documents.
• The average client who prepares their own taxes gets good at it. They do it every year and their circumstances don’t change much. But this experience doesn’t prepare you Form 982, which is a new experience. Many clients tell me other CPAs don’t even prepare Form 982.

The Tradeoff between Aggravation and Cost

Our price for Form 982 varies between $125 and $350, plus the cost of the base tax return. The cost driver on Form 982 cost is your ability to give us information. So being organized decreases your costs. We don’t prepare Form 982 by itself; we only include it as part of our preparation for the entire tax return. Figure in the cost of Turbo Tax, your time and aggravation to help gauge whether the cost of us doing it is worthwhile. (910) 399-2705.

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