IRS tax Form 1099-C CPA discusses what should be in the Form 1099-C instructions | 2014 Form 982 instructions | Publication 4681, Canceled Debts,

The Form 1099-C instructions are for the bank , not the taxpayer. Considering that millions of Form 1099-C will get issued for 2014, you’d think the Form 1099-C instructions would take you through the entire cancelled debt tax reporting process. I handle S Corporation cancelled debt and the Form 1120-S instructions don’t even mention cancelled debt, but there’s a line in Schedule B that directly asks about Form 1099-C. Ditto on Partnerships, the Form 1065 instructions aren’t’ that helpful. So, as a Form 1099-C CPA I’ll try to provide what should be in the Form 1099-C instructions.

Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments

Publication 4681 are the real Form 1099-C instructions, at least for individual taxpayers and Schedule C filers. I think it pays to read Publication 4681 before you read the Form 982 instructions. While Publication 4681 quickly descends into IRS jargon it’s a good prep for the Form 982 instructions. Look for an example that matches your circumstances.

Why isn’t there a single source of Form 1099-C instructions?

Well Form 1099-C covers so many issues you must incorporate other IRS instructions to get the whole picture. Let’s discuss a rental property foreclosure as an example for information not covered in Publication 4681, the 1099-C instructions or Form 982 instructions.

• The bank takes your rental property and sends you a Form 1099-C, eventually.
• The amount in Box 2 is taxable income unless you can exclude it on Form 982. That should be on the first page of the Form 1099-C instructions and Publication 4681.
  • Never pay taxes on the amount in Box 2 without exploiting all of Form 982.
• Check the date on Form 1099-C.
  • It doesn’t matter to the bank because the IRS has many benchmarks on when the banks can forgive debt.
  • But it matters to you. why? You might have been more insolvent, helping you on Form 982, in say March, than December.
  • Note you can use more than one exclusion on Form 982.
• The foreclosure means you must report the gain or loss on the “sale” of the rental property on Form 4797.
• Again the Form 4797 instructions cover so much material that taxpayers rely on the tax software.
• You really don’t want to do that.
  • You need to understand the Form 4797 calculation.
• The Form 4797 involves the Purchase HUD, the Fair Market Value of the rental property on the date of foreclosure and depreciation recapture.
  • Again there are IRS wrinkles. Sometimes you have to use Form 3115 to claim prior unclaimed depreciation.
  • Often landlords don’t include the buyer’s settlement cost in the purchase of a rental property.
    • Let’s the say the buyer’s settlement costs were $4,000 and the landlord didn’t claim that. That $4,000 means less loss on the rental property foreclosure, meaning you pay perhaps $1,000 of un-required additional tax.
  • The bank’s Fair Market Value reported on Form 1099-C is sometimes optimistic which incidentally increases the bank’s bad debt expense, lowering their tax bill.
  • Look at the county records to see what it actually sold for.
• In the year of disposition you can claim prior disallowed passive rental real estate amounts. This is found on Form 8582, Passive Activity Loss Limitations.
  • There can be thousands of dollars of legitimate tax deductions lurking there.
• Remember to close out all the improvements, like say the cost of a new refrigerator, as part of the final year’s Schedule E.
  • Perhaps read the Schedule E instructions for handling the final Schedule E.
  • If you don’t like the Schedule E instructions, Form 8825 is pretty analogous to Schedule E and the Form 8825 instructions are easier to understand.
• Prepare Form 982.
  • Some tax software doesn’t cover Form 982. But sometimes, if you understand the process, you can do a manual work around.
  • Remember the reduction of tax attributes.

“How can you tell if you have a good Form 1099-C CPA?

• He’ll discuss potential future tax consequences per the reduction of tax attribute on Form 982.
• He’ll ask to see last year’s return.
• He’ll discuss tax positioning if the Form 1099-C triggering even hasn’t occurred yet.
• He’ll ask about prior disallowed losses if the Form 1099-C is for a rental property foreclosure.”

What about Form 1099-A

Again the Form 1099-A instructions aren’t for the tax payer. In our example you’d do everything except prepare Form 982.

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