How do I refile to include Form 982? | insolvency and cancelled debt CPA discusses amending tax return with IRS Form 1040X

Re-filing an earlier tax return to include IRS Form 982, Reduction of Tax Attributes, is the most common reason I amend Client tax returns. Every year I get a few new Clients who simply paid tax on the entire amount of Box 2 of Form 1099-C, Cancellation of Debt. Often that’s thousands of dollars paid because they didn’t know about Form 982. I’ll discuss common cancelled debt tax reporting issues first and then discuss IRS Form 1040X, Amended U.S. Individual Income Tax Return. While I’m discussing personal taxes here, businesses have cancelled debt issues as well and can also re-file tax returns to include Form 982.

If you want more information than what I’ve provided try:

• IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments.
• Form 982 instructions.
• Form 1099-C instructions.
• IRS website.

Overview - IRS Form 982, Reduction of Tax Attributes, is the only way to battle IRS Form 1099-C, Cancellation of Debt

• Form 1099-C reports different kinds of cancelled debt:
  • Short sales on rental real estate.
  • Primary residence foreclosures.
  • Forgiven student loan debt.
  • Credit card cancelled debt, etc.
• The amount in Box 2 of Form 1099-C, Cancellation of Debt, becomes taxable income unless you can use Form 982, Reduction of Tax Attributes, to exclude it.
  • Common exclusions available on Form 982 include:
    • Bankruptcy.
    • Discharge of qualified principal residence indebtedness.
    • Discharge of qualified real property business indebtedness
    • Insolvency.

Don’t ever pay taxes on the amount in Box 2 of Form 1099-C without wringing out every possibility on Form 982 to exclude it.

When do I re-file to include Form 982?

The most common example? An IRS Notice CP2000 arrives in the mail proposing additional taxes due on an earlier tax return for a Form 1099-C the Client never received. Sometimes you need only file Form 982 to resolve this issue. But sometimes I find other overlooked tax reporting opportunities in the earlier return that require using Form 1040X, Amended U.S. Individual Income Tax Return. You can amend most back tax returns. But you lose the ability to generate a tax refund after three years. And yes, I’ve seen refunds generated by amending back tax returns that included Form 982.

How do I re-file to Include Form 982, Reduction of Tax Attributes?

• Basically you just create a new version of the back tax return that’s correct, given the new circumstances.
  • In this case it’s excluding taxable income from Form 1099-C by using Form 982.
• Then you prepare Form 1040X, Amended U.S. Individual Income Tax Return.
• Form 1040X summarizes the changes in the new, correct tax return to the original back tax return.
  • Form 1040X requires explanations.
    • I usually provide line by line explanations.
    • I usually provide supplemental documentation to corroborate the explanation.

Re-filing tax returns to include Form 982 pitfalls

• I don’t work for the IRS but they don’t seem like the type of Agency that passes up income taxes without a fight.
  • I always assume the re-filed return gets extra scrutiny by the IRS. Make it bullet proof.
  • Don’t let your re-filed tax return open up other IRS issues.
• Using Form 982 on re-filed return may have future tax consequences.
  • The sometimes requires you to deduce the basis of your other assets to exclude the debt on the re-filed return.
  • That could mean paying more tax, or generating less refund, if you sell other assets in the future.

Another aspect of Form 1099-C, Cancellation of Debt

Form 1099-C sometimes triggers a “sale” of an asset.

• It often doesn’t seem like a true sale. Examples include:
  • Foreclosures.
  • Short sales.
  • Repossessions.
  • Deed in lieu of foreclosure.
  • Abandonment.
• Use Form 4797 or Schedule D to calculate the taxable gain and loss.

I’m a cancelled debt CPA with good experience with Form 982. If the Recession caught you short, maybe I can help you avoid paying taxes on cancelled debt. (910) 399-2705.