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Insolvency CPA explains the Cancelled Debt exclusion process on Form 982 | Form 1099-C

Insolvency CPA Wilmington NC

Gary Bode, CPA: if you need help with Form 982, call for a free phone consult at 399-2705.

Hi, I’m Gary Bode, an insolvency CPA with a virtual office to help long distance folks deal with cancelled debt and Form 982. My physical office is in Wilmington NC.

What is Cancelled Debt?

Cancelled debt occurs when your financial institution “forgives” part of a loan. In 2012, typical scenarios include mortgage foreclosure, short sales, car re-possessions, decreased credit card payoffs, etc.


The bank reports the amount of cancelled debt, and when it was cancelled, to both you and the IRS on Form 1099-C.

Cancelled Debt automatically becomes Taxable Income

If you do nothing, cancelled debt becomes taxable income on the company’s tax return or an individual’s Form 1040.

Form 982 to the Rescue

You have a right to prevent cancelled debt becoming taxable income by exempting or excluding it on Form 982. Cancelled Debt CPAs say excluding some cancelled debt is better than excluding no cancelled debt. How much tax liability can you save? A rule of thumb says 25% of cancelled debt excluded. Remember that’s rough figure for a complex calculation! The basic IRS guideline? You may exclude cancelled debt to the extent you were insolvent immediately before the debt was cancelled.

Insolvency CPA

Insolvency became a practice niche for CPAs a few years ago. Unfortunately, we’re still needed in 2012. The IRS means well on Form 982 but it covers multiple situations, and is tricky to navigate. And especially with companies, the insolvency calculation is only part of the tax preparation. Form 982 repercussions ripple though other areas of the tax return. Insolvency CPAs arose to handle this specialized tax snake pit.

Form 1099-C Precautions

  • Look for your Form 1099-C. Sometimes banks only mail a copy to the IRS.
  • Act on the 1099-C. Include it into your tax return. Not doing so guarantees an IRS audit.
  • Make sure the amount is correct. You have a right to understand how much the bank wrote off and how they calculated it. If you have trouble getting an answer, calling an insolvency CPA, or perhaps an attorney, is prudent.
  • Make sure the date is correct. Often banks use December 31st, perhaps for convenience. But the Form 982 calculations are based on the actual date. If you had a short sale in February because you were insolvent, maybe you’re not as insolvent on December 31st, so less cancelled debt can be excluded.

Can I amend my past Tax Return if I didn’t use Form 982?

Yes, up to the IRS time limit.

I’m an insolvency CPA because the IRS rightfully allows some relief from cancelled debt taxation but makes the Form 982 process so complex. For a free phone consult, call (910) 399-2705.

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