"Gary Bode has just completed our tax returns for the first time and I am totally satisfied with his level of service. He has been very attentive, asked all the right questions, and not only fixed some problems from our previous accountant, but also set us up for future success through a thorough and professional analysis of our corporate structure in conjunction with several personal variables.Gary Bode, CPA: IRS insolvency, Form 982 and cancelled debt may deserve a CPA. For a free initial phone consult, please call 399-2705.
Insolvency CPAs see client confusion over cancelled debt. Folks receiving a 1099-C usually have cash flow problems and are more likely to self prepare their tax returns. So 1) the cancelled debt gets included in their income and they pay taxes on it, or 2) they never receive Form 1099-C and didn’t realize they should have gotten it. Cancelled debt can be excluded from income, via Form 982. To the extent of your insolvency immediately before debt was cancellation. In either case, an insolvency CPA would recommend amending that initial 1040, through Form 1040-X, to include Form 982, probably generating an IRS refund.
Step by Step Cancelled Debt, Insolvency, and Form 1040-X and Form 982: Overview
Cancelled Debt – Form 1099-C
If your car was repossessed, it eventually got sold. The bank then applied the proceeds towards your loan. Other examples of cancelled debt examples include; cancelled credit card debt, foreclosure on real estate, short sales of real estate etc. But that’s not the end of a sad story. The bank sends you and the IRS a Form 1099-C reporting the amount of the unpaid loan. The IRS considers that cancelled debt as income and you pay taxes on it. Unless you can exclude it on Form 982 secondary to being insolvent when the bank wrote off the loan.
Original Tax Return – Two Scenarios
- Being a good citizen you filed your tax return on time and paid taxes on the cancelled debt. You later realize you filed incorrectly and want a refund.
- You didn’t include Form 1099-C on your original return. Sometimes lenders, being miffed over eating part of your loan, only send Form 1099-C to the IRS. Sad but true. This leads to an eventual IRS audit and a demand for additional taxes, penalties and interest.
How CPAs work the Insolvency Issue on Form 982
Insolvency CPAs first check Form 1099-C for accuracy. Often the date is wrong. If your car was repo(ed) in 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. Sometimes the amount on 1099-C is wrong. Banks make mistakes.
Next we gather information from you about your financial condition in June. If your total liabilities exceeded your total assets we start to prepare 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 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. Then we look at what the taxpayer’s version should be. Form 1099-C is especially reviewed for accuracy. The bank has to revise Form 1099-C if we can prove it is inaccurate. We then fill out Form 982, which requires the insolvency calculation. Finally we prepare an amended return using Form 1040-X, include Form 982, and explain 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.
- Click on 982 in the forms list in the left sidebar.
- Click on 1099-C in the left sidebar.
- Click on Pub 4681 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.
Our CPA firm serves a large geographical base through our virtual office, including international clients. Of course, we serve local Wilmington NC clients too. We understand insolvency and cancelled debt issues. Our goal is to help you through a rough financial situation by lowering your tax bill using every legitimate technique. For a free initial phone consult at (910) 399-2705
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.
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.