Insolvency CPA FAQs on Form 982, Form 1099-C, Form 1099-A, Short Sales and Foreclosures

Insolvency CPAs handle lots of questions for clients and potential clients. Here’s what I’m asked most often.

Can I use more than one provision on Form 982?

Sometimes. For example, with a short sale on a rental property we sometimes use both the Insolvency and Qualified Business debt provisions of Form 982.

What is Insolvency on Form 982?

Insolvency is one technique available on Form 982 to exclude cancelled debt from taxable income. Insolvency is the most frequent provision used on Form 982, at least in our experience. Insolvency on Form 982 has a specific IRS definition, so some folks get rattled by the term.

What is Cancelled Debt?

Any time a lender writes off debt for you or your company, that’s cancelled debt.

• With short sales the bank typically writes off the remaining mortgage due, making the forgiven amount cancelled debt. If you owed $100,000 of mortgage during a short sale, and the bank accepts $40,000 from the sale as payment in full, the $60,000 write off is cancelled debt.
• If your credit card company takes $2,000 as payment in full for $8,000 of credit card debt, the $6,000 write off is cancelled debt.

Why does Cancelled Debt become Taxable Income for the IRS?

Great question. But even as a Form 982 CPA, I don’t understand the logic. But it does.

“Don’t let cancelled debt on Form 1099-C become tax able income without exploiting every possibility on Form 982.”
- Gary Bode, Form 982 CPA and Insolvency tax accountant

How much Income Tax will I pay on the Cancelled Debt?

Any amounts that can’t be excluded on Form 982 incur 25%-30% of income tax. Sometimes more. So, $10,000 of cancelled debt could raise your tax bill by $2,500 - $3,000. Harsh.

Does filing Form 982 mean the IRS will audit me?

In general, Insovency CPAs just assume the return will be audited. Personally, I try to anticpate IRS red flags. So we sometimes don’t e-file and attach a cover letter and supplemental documentation for paper filing.

Is all Cancelled Debt become Taxable Income? Or is there anyway to keep cancelled debt from becoming taxable income?

Yes, all cancelled debt automatically becomes taxable income. But you can almost always find a way to exclude at least part of cancelled debt from taxable income through Form 982.

Where can I get help with Form 982 Insolvency?

• IRS Publication 4681
• Form 982 instructions.
• Other resources on the IRS website.
• CPAs
• Tax Attorneys
• Calling the IRS.
• Tax research software.
• AICPA publications.

Here’s few of our Previous Posts on Short Sales involving Form 982, 1099-C, Form 1099-A, Form 1099-S, Form 4797, Insolvency and Qualified Business Debt

• Insolvency from 1099-C and Form 982.
• Short Sales, Insolvency and Form 982.
• Cancelled debt, Forms 1099-C and 1099-A.
• Short sale Form 1099-A.
• Credit card Insolvency on Form 982.
• Rental Property Short Sales.
• Other Forms used with Form 982.
• Amending a tax return to include Form 982.
• Form 982 Insolvency example.

What happens if Form 1099-C is wrong?

Well, Form 982 CPAs will use the corrected figures for your tax return. Of course the IRS thinks the Form 1099-C is Gospel. So we carefully document the changes. For example, the bank may issue the sale Form 1099-C and Form 1099-A to everybody on the short sale Deed. We’d split that into your share of it. Another example? The bank sends Form 1099-C in a later year. If that works against you for the Insolvency strategy on Form 982, we try to make a case for the earlier tax year and amend the earlier return.

Why is my Form 1099-C and/or Form 1099-A late?

Both Forms 1099-C and 1099-A were due on February 1st, 2013. But we’ve clients (multiple) receive this as of March 15th 2013.

I didn’t get my Form 1099-C?

• Well the problem here, generally, is that the IRS got a copy. So you’ll be audited if it isn’t on your tax return. And of course they’ll want 25%-35% of the cancelled debt as back taxes plus penalties plus interest. Form 982 CPAs pull your IRS transcripts to see if this is the case.
• Maybe you moved and the bank sent Form 1099-C to the short sale address.
• Sometimes the bank cancels the debt later than you thought and Form 1099-C comes in a later year.
• Hoping it won’t come is wishful thinking. Why? I imagine the banks have to reconcile their bad debt to Form 1099(s) on their IRS tax return.

Who can help me with my Form 1099-C?

• Don’t go to a national tax chain. Trust me on this. Many CPAs don’t even want anything to do with Form 982!
• Tax software. Well you sorta kinda gotta know what you’re doing even with TurboTax. But I’m sure many folks go this route.
• IRS sponsored preparers like the military or VITA. They’re great for basic returns. Form 982 not so much.
• Try our free consult for Form 982 and Insolvency. Sometimes we can solve your issue for free depending on the question. And we don’t try to push services on you. If you get uncomfortable with Form 982 and Insolvency, or with your short sale, consider calling us at (910) 399-2705.

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