Cancellation of Debt Income & Form 982

My debt resolution company saved me a lot of money on my debts. Will I owe taxes on cancellation of debt income (CODI)?

I recently settled on my debts through Freedom Debt Relief and I want to know if I will owe taxes from any cancellation of debt income (CODI) or if I will be 1099 taxed for the big savings I received.

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Highlights


  • How a cancelled debt can lead to a tax obligation.
  • You may be able to avoid declaring cancelled debt as income.
  • Consult with a tax professional, whenever you have debt cancelled.

Will you owe the IRS any taxes if you receive a 1099-C? The short answer is, “it depends.”

You might wonder:

  1. Why you received a 1099-C
  2. How much in taxes, if any, you may owe
  3. If you can avoid paying taxes

Learn how to handle a 1099-C and how to calculate taxes you may owe. You might be able to avoid taxes by following a process the IRS calls cancellation of debt income (CODI). Read on to learn more about your 1099-C and how CODI might keep your tax bill under control.

What’s a 1099-C, and Why Did Someone Send Me One?

Under federal law, a person or business with “a significant trade or business of lending money” must send a taxpayer a “Form 1099C Cancellation of Debt” whenever it forgives or cancels a debt greater than $600. This may create a tax liability for you because the cancelled debt is considered “income” for tax purposes. The amount of debt forgiven must be reported on a IRS Form 982 (PDF) and this form must be attached to your tax return.

The organization that sends you a 1099-C may be a bank, credit union, or even a federal government agency (such as the USDA) that lent you money, then cancelled the debt. You might receive a 1099-C if debt settlement business such as Freedom Debt Relief negotiated a savings of more than $600 on a debt you had with a credit card issuer. A collection agent may not send you a 1099-C.

he 1099-C is probably the most misleadingly named IRS form. Even though the IRS calls it the “1099-C, Cancellation of Debt”, this form does not mean the debt is forgiven, deleted, forgotten, or is no longer collectible. It is possible for an original creditor that issues a 1099-C to sell your account to a collection agent. The collection agent may collect a debt on which a 1099-C was issued.

How Much Do I Owe In Taxes?

You must include the amount mentioned in your 1099-C as income when you file your income taxes. As mentioned, you disclose the 1099-C information by completing a Form 982 and including the 982 the next time you file your income taxes. A 1099-C is not a tax bill, but it can have a significant impact on your tax situation if the amount is large.

If your debts cause you financial distress, talk to a Bills.com debt resolution partner to learn your options to resolve your debt.

How to Avoid Taxes Caused By a 1099-C With CODI

You may reduce or eliminate your taxes due through a procedure the IRS calls a Cancellation of Debt Income (CODI). CODI applies if you were insolvent immediately before the cancellation occurred. You calculate CODI by completing a Form 982.

For the purposes of completing Form 982, the IRS considers you insolvent if the total of all your liabilities exceeded the fair-market value (FMV) of all your assets. To determine insolvency, assets include the value of everything you own (including assets that serve as collateral for debt and exempt assets which are beyond the reach of creditors under the law, such as interest in a pension plan and the value of a retirement account). Liabilities include:

  • The entire amount of recourse debts, and
  • The amount of nonrecourse debt that is not in excess of the FMV of the property that is security for the debt.

Here are two hypothetical examples the IRS uses to describe the cancellation of debt income concept:

Greg had an unpaid $5,000 credit card debt. Greg’s credit card lender sends him a Form 1099-C showing a cancelled debt of $5,000. Greg’s total liabilities immediately before the cancellation were $15,000 and the FMV of his total assets immediately before the cancellation were $7,000. This means immediately before the cancellation, Greg was insolvent to the extent of $8,000 ($15,000 total liabilities minus $7,000 FMV of his total assets). Because the amount by which Greg was insolvent immediately before the cancellation exceeds the amount of his debt cancelled, Greg can exclude the entire $5,000 cancelled debt from income.

Now let’s change a few facts. Let us say Greg’s total liabilities immediately before the cancellation were $10,000 and the FMV of his total assets immediately before the cancellation were $7,000. In this example, Greg is insolvent to the extent of $3,000 ($10,000 total liabilities minus $7,000 FMV of his total assets) immediately before the cancellation. Because the amount of the cancelled debt exceeds the amount by which Greg was insolvent immediately before the cancellation, Greg can exclude only $3,000 of the $5,000 cancelled debt from income under the insolvency exclusion.

Cancellation of Debt Income Worksheet
  Total Liabilities   Asset Fair Market Value   Insolvency Amount
How Much Can Be Excluded From Income
How the IRS calculates your insolvency. Source: IRS & Bills.com
Greg Example No. 1 $15,000  -  $7,000  =  $8,000
Because this exceeds the amount of cancelled debt, Greg can exclude the entire $5,000 shown on his 1099-C.
Greg Example No. 2 $10,000  -  $7,000  =  $3,000
Because this is less than the amount of cancelled debt, Greg can exclude only $3,000 of the $5,000 shown on his 1099-C.
You    -     =   
Note See IRS Publication 4681 for more information and instructions on how to complete a Form 982

More Information on Cancellation of Debt Income

The Internal Revenue Service document Publication 4681 contains more information on the tax consequences of cancelled debt. It also contains specific instructions on how to complete Form 982, and more hypothetical examples.

If you receive a 1099-C, keep it with your other tax documents. Give the 1099-C to your tax preparer, and give the tax preparer information regarding your total liabilities and the FMV of your assets as they were immediately before the cancellation.

IRS problem? Talk to a Bills.com tax resolution partner to learn how you can negotiate a settlement to your tax issue.

Mortgage Forgiveness Debt Relief Act

You may have heard about the Mortgage Forgiveness Debt Relief Act. MFDRA was in effect until the end of 2013. As of this writing, Congress has not extended MFDRA, but it did so in 2013 when MFDRA expired at the end of 2012. If your 1099-C relates to a mortgage debt cancelled in 2013 or before, MFDRA may apply to you.

The Mortgage Forgiveness Debt Relief Act provides tax relief for mortgage loans on primary residences forgiven in 2007 through 2013. See the IRS document The Mortgage Forgiveness Debt Relief Act and Debt Cancellation for more information. MFDRA does not help you with credit card or similar personal debts settled with a debt negotiation, consolidation, or resolution program.

I hope this information helps you Find. Learn & Save.

Best,

Bill

Bills.com

90 Comments

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  • 35x35
    Jan, 2013
    Tom
    I just received two 1099-C forms from Bank of America for the same credit-card account, the first discharging some $3,900 in debt for which "borrower was personally liable" ... and a corrected form a day later, reducing that amount to zero and saying the borrower was NOT liable. Can I assume that I needn't claim this as income? And can the creditor still try to collect after discharge? Thank you very much for your consideration and assistance.
    0 Votes

    • 35x35
      Jan, 2013
      Bill
      Without knowing more about your financial situation and the $3,900 debt, we won't venture a guess what the two 1099-Cs mean. Did you file for bankruptcy, which discharged the Bank of America debt? Is this a case of mistaken identity or identity theft? Did you reach a settlement agreement with BofA about the account?

      Your best course of action is to take the 1099-Cs to a tax professional: certified tax preparer, CPA, enrolled agent, or tax lawyer. He or she will ask the questions mentioned here, plus many more about your financial and tax history.

      Regarding your second issue, unfortunately, an original creditor is permitted to issue a 1099-C and continue to pursue the consumer to collect the debt. Alternatively, the original creditor is permitted to issue a 1099-C and sell the debt to a collection agent. If you later settle the debt, you may need to file an amended tax return.
      1 Votes

  • 35x35
    Apr, 2012
    Nei
    Bill, I received three 1099-C for year 2011, one for each of the last quarter of the year. My question is, since the date of cancellation are different: Do I have to file a form 982 for each one of them or can I combine them all in one?
    0 Votes

    • 35x35
      Apr, 2012
      Bill
      I recommend that you have a tax professional review the documents and instruct you how to fill out the IRS tax form 982.
      1 Votes

    • 35x35
      Apr, 2012
      Robert
      You have to figure the extent of your insolvency separately just prior to each of the cancellations (i.e. you have to fill in 3 worksheets). For the first debt cancellation, you still owed the other two, so these would be included in your liabilities for the first. For the second cancellation, only the third one can be included as a liability and for the third, none of them would be included. More than likely, your other assests didn't change much from the first to the third cancellation, so some entries may be the same on all 3 worksheets. One thing that would change is your cash on hand (e.g. checking and savings account balances). Also, any IRA's or 401K's you have would likely ave changed value. Just fill out 3 worksheets.
      1 Votes

  • 35x35
    Apr, 2012
    Lisa
    Bill, can't seem to find the answer I'm looking for. I live in Louisiana. The consent judgment/community property settlement had my ex-husband responsible for certain credit card debts. He then was discharged through bankruptcy in August 1998, which he included the credit cards he was responsible for. One credit card company decided that since I was an authorized user, the account changed to an individual account under my name and discharged as bad debt. My credit report was flagged as consumer disputes charge. The account was sold twice, seen this on my credit report. Back in 2008, I reviewed all 3 credit agencies, the accounts were not listed on the credit reports. About 3 weeks ago I get a 1099-C from the last company that bought the debt, stating date canceled 12/15/11. Was I even legally responsible for this debt, after the community property settlement?
    0 Votes

    • 35x35
      Apr, 2012
      Bill
      In general an authorized user is not responsible for the debt on the account. I recommend that you speak with a tax professional and show him the paperwork including the 1099-c and documents showing that you were an authorized user.
      1 Votes

  • 35x35
    Mar, 2012
    Judy
    Occasionally I am able to get one of my credit card companies to reverse a late charge, or my bank to reverse an overdraft fee. Are these also considered taxable forgiven debts?
    0 Votes

    • 35x35
      Mar, 2012
      Bill
      Interesting question. One can create a convincing argument either way. Have you been issued a 1099-A or 1099-C for these items? If not, do not let them concern you.
      1 Votes

  • 35x35
    Mar, 2012
    Berta
    Hi Bill, I had a COD and based on the insolvency worksheet in Pub.4681, I am insolvent for the full amount of debt canceled (100k of student loans). I have indicated this on Form 982 but it states that I also must reduce my Tax Attributes in Part II. Is it possible that I do not have any tax attributes? I do not own a business, or property. I earned a negligible amount of money, on which I owe no taxes, nor am owed a refund. What is the Tax Attribute called "minimum tax credit"? Does that mean that my standardized deduction for next year is reduced by a portion of this year's COD? If not, how do I note on Form 982 that I do not have any Tax Attributes? Thank you!
    1 Votes

    • 35x35
      Mar, 2012
      Bill
      You need to address your excellent and complex questions to a tax professional. I can't give tax advice, but will share some thoughts with you about the issues your questions raise.

      The minimum tax credit tax attribute is a credit carryforward if you paid alternative minimum tax in a prior year. Generally, this credit arising from when taxpayers incur alternative minimum tax from items whose timing is different when computing the alternative minimum tax and regular taxes.

      Most taxpayers have at least some personal-use property (tax attribute number 5 to be reduced). This includes cars, home furnishings, electronics, etc. Reduce the tax attributes (original cost basis of property) of this class of items by the COD amount. If, however, total liabilities after the COD exceed the basis in their personal-use property, no reduction is required according to IRC 1017(b)(2). So, for example, if you still have credit card debt and auto loans of $20,000 and your basis in all personal-use property is $15,000, no reduction of basis would be required. In this case, you would show the detail on the reduction of tax attributes statement – lisingt out personal-use property and each item’s cost basis, then detailing all remaining liabilities after the COD. If the total basis in personal-use property exceeds total liabilities, show the detail on the statement but reduce the basis in each item proportionally.

      Again, please discuss this with a tax professional.
      1 Votes

    • 35x35
      Mar, 2012
      Curious
      Please notice that Bill indicated "basis" in assets for the reduction of tax attributes calculation. This is a different number than what you used to calculate your original insolvency. Basis is typically (but not always) cost. So instead of using the resale value of your car (FMV) now you would use how much it cost you to buy it originally. The reduction of tax attributes portion of this exclusion process is the most complicated, so please get professional assistance. If your facts are really as straight-forward as you mention then it shouldn't take you long to get an answer.
      1 Votes

    • 35x35
      Mar, 2012
      Berta
      Dear Bill and Curious L., First of all, THANK YOU for your very informative answers. I've spent a great deal of time searching for information about IRS Form 982 and I've found lots of comments about 1099-C's, Form 982 in general, and even exclusionary cases (like insolvency) but with the exception of your excellent comments, I have found very little about reducing tax attributes as it pertains to Part II of Form 982. This includes advice I sought from an agent at a local (franchise-owned) tax preparation firm. Rest assured, I will be seeking the expertise of another tax professional. That said, may I 'pick your brain' just once more? The BASIS (thanks, Curious!) of my personal-use property (no more than 10k) is far below my liabilities AFTER my cancellation of debt (still owe another 60k in student loans). Based on this (as I understand it), no reduction of tax attributes is required in Part II of Form 982 (according to IRC 1017(b)(2)). How do I indicate this on my taxes? What exactly does a "statement" to the IRS with this sort of information look like? I did find a legal aid society that posted an example of a letter to the IRS that allows one to document specific monetary amounts to justify insolvency. Would it be appropriate to use a letter such as this and modify it to say that I am justifying why I have no reduction in tax attributes? Again, thank you so much!
      0 Votes

    • 35x35
      Mar, 2012
      Curious
      Again, please rely on a tax professional. Follow the instructions for the forms that you are completing. If they require that additional schedules be submitted, then do so. Whether or not they are required submissions is separate from whether or not you should retain them for your records in the event that you are audited. Let me know if you have any other questions. Hope everything works out for you.
      0 Votes

  • 35x35
    Mar, 2012
    T
    Hi Bill, I read through the entire IRS booklet on Cancelled Debt and yet there was no example for my scenario. Quick detail: Spouse (before we were married but after already owned property together) guaranteed a bank loan obtained in his disregarded entity LLC's name. Bank liened only his house, but not the property that we jointly owned. Currently discussing settlement which will result in cancelled debt. Question is how to calculate insolvency for spouse. For assets and mortgages that we jointly own does it mean spouse would list asset FMV @ 50% and mortgage amount @ 50%. For IRA accounts does anything in my name factor in, or only IRA's in spouse's name. We have filed taxes jointly since marriage....does filing for insolvency mean we will need to file married separately in the year of the cancellation of debt? Any help would be much appreciated. We have tax accountants, one of which is a tax attorney, doing our taxes, but they cannot help us until they have the cancelled numbers. I just want to be able to see if insolvency is possible first. Thanks
    0 Votes

    • 35x35
      Mar, 2012
      Bill
      I have to give you the same answer as your tax lawyer. The numbers will tell the tale.
      0 Votes

  • 35x35
    Feb, 2012
    Rich
    Hey Bill, Hope you can help me with this. I am attempting to cancel a substantial portion of a note that an individual (not a financial institution) wrote to me and my partner in 2010 to purchase his business. The business failed and the note holder seems to be ok with some portion of the note being cancelled. My partner and I were 60/40 in the capital structure (It was an LLC, but this particular note is personally guaranteed by both of us). Since the failure of the business, my parter declared bankruptcy. I guess my question is if I can negotiate a debt cancellation with the note holder does my bankrupt partner split the tax liability in the same proportions as our ownership interest even though he has been protected by bankruptcy? Or more to the point would I be responsible for the entire cancellation of debt because I am the only surviving solvent partner. Any help would be great Rich
    0 Votes

    • 35x35
      Feb, 2012
      Bill
      Rich, I can't offer you tax advice or legal advice about how the bankruptcy affected things. You really need to speak with a tax professional and perhaps a bankruptcy attorney to get answers to your very good questions.

      That being said, it is my non-authoritative opinion that you will be viewed as solely responsible for the debt cancellation.

      If you get a professional answer, please report back.
      0 Votes

    • 35x35
      Feb, 2012
      Rich
      Hi Bill First off, thank you for your prompt response to my inquiry. I spoke to a bankruptcy atty about the allocation of debt forgiveness for tax purposes and he told me that since the lender in my situation is and individual and not a bank or other financial institution that one can negotiate with the lender to reduce the amount owed to whatever can be arranged and then add a clause to the new reduced amount document that the lender will not file a 1099c with the feds thereby avoiding the tax liability. The lawyer said that this is done regularly when not dealing with a regulated entity such as a bank and is completely legal (at least here in NJ). Hope this helps someone else in the same situation. Now ,at least, I can negotiate with my lender without the overhang. Thanks again you were extremely helpful. Rich
      0 Votes

  • 35x35
    Feb, 2012
    Roddy
    For COD, I recently resolved a private student loan that was over $600 and received a form 1099-C. When determining insolvency immediately before the debt was forgiven, can I count the resolved debt as part of my liabilities? If I can, can I use the entire amount, which is the amount charged off plus what I paid in the settlement? Also, thanks for the great article!
    0 Votes

    • 35x35
      Feb, 2012
      Bill
      For the purposes of measuring insolvency, you use the full amount of all liabilities the moment before you signed a contract to settle the debt. Let me make up some facts for the purposes of illustrating my point: Let us say the balance on a debt was $12,000 and you settled it for $5,000. You use the $12,000 amount plus whatever other liabilities you have (credit card, medical bills, car loan) to tally the liabilities side of the equation. The fact that you settled the debt for $5,000 is irrelevant.

      Out of curiosity, what was the balance of your student loan and how much did you settle it for?
      0 Votes

    • 35x35
      Feb, 2012
      Roddy
      I was in default on a $42,000 loan and the loan company settled the debt for $6,000. That left with $32,000 to claim as income. Settling was better than not paying, even if I do have to claim as income and pay the tax. I am working with a tax professional company right now and I am going to be able to show I am insolvent for $42,000, which means I will not have to show the charged off debt as income and pay the tax on $32,000. That swings me from owing to getting a return of a couple of thousand!
      0 Votes

    • 35x35
      Feb, 2012
      Bill
      Glad to hear. It is important to work with a tax professional to receive sound advice.
      0 Votes

    • 35x35
      Feb, 2012
      Maricar
      Hello Roddy was is it that easy to show Insolvency? We have a timesgare loan that is in the process of being forgiven and we afraid of the tax income on our tax return.
      0 Votes

    • 35x35
      Mar, 2012
      Curious
      Did you have a reduction in tax attributes? Make sure you ask your tax professional about the full impact. Even though you may be insolvent, there could be a deferred impact. Showing insolvency is not always difficult, but taking the exclusion could reduce other tax items that you are trying to claim. Look at publication 4681 and form 982.
      0 Votes

    • 35x35
      Mar, 2012
      Roddy
      Maricar, I used the insolvency worksheet provided on page 6 of pub form 4681. I pulled all my records for the time immediately before I canceled the debt. I used zillow for my house price, kelly blue book for my car values, checked my pension, checking account and 401k statements at the time before canceling. It was very hard to put all this together and put the values in the IRS worksheet. I then used a tax professional service and purchased the extra protection just in case i was selected to be audited by the irs. I let them do the forms. It cost me a little extra, but not very much when compared to what I would have had to pay. I had a little student loan payments to deduct, as well as two kids, a wife, mortgage interest, and second mortgage interest. It was not very difficult.
      0 Votes

    • 35x35
      Mar, 2012
      Tom
      Bill, I need a bit of clarification. My daughter had a vehicle that was repo'd in 5/2008 and sold. They came after her for the balance of some $8000 and finally settled on $2300 in June 2010, 2 years later. So does she have to list the vehicle as an asset when completing the insolvency work sheet since she did not have the vehicle immediatley prior to to the time debt was forgiven?
      0 Votes

  • 35x35
    Feb, 2012
    LADY B
    I Just got a letter from a payday loan place stating I had a debt of $498 with them from 2008 and per irs rules 4861 they forwarded me a 1099c form, and they added on $2040 of intrest on it! My questions are 1, how could they just be contacting me after 3 years, 2. per 4861 the amount they say I owe is under $600 so wouldn't this be crap? But in boxx #3 the intrest is high, so would that allow them to meet the $600 minimum to send me this form? And lastly, shouldn't this had been sent to me like 3 years ago?
    0 Votes

    • 35x35
      Feb, 2012
      Bill
      Consult with a lawyer in your state who has tax experience. First, it is not clear to me a payday lender qualifies to issue a 1099-C. Second, the three-year delay may or may not be significant. Third, the inflated interest and other charges may not be legal according to your state's usury laws.
      0 Votes

  • 35x35
    Feb, 2012
    West
    Hello. My spouse purchased a vehicle, prior to knowing each other. At some point thereafter, my spouse stopped making payments and immediately called the lein holder stating the financial inability to make futher payments. The lein holder made mutual arrangements to repo the vehicle which commenced shortly thereafter. This all occurred back in 2005 - again; prior to us knowing each other whatsoever. Fast-forward to present Jan 2012. My spouse receives a 1099-C "Cancellation Of Debt" letter from the prior lein holder. It states that, in 2011, the lein was cancelled (unbeknownst to my spouse ~ first notice of this fact) and that the outstanding amount would be considered income and, as such, was reported to the IRS. My question is rather simple: Since spouse is not employed, nor has been for many years due to raising a family, what obligation if any does my spouse have to this situation? Moreover, am I responsible in any way to pay income tax on a transaction (purchase and subsequent repo) that transpired well before we ever met?! It would seem to me that, when one meets a potential spouse, you no longer should only ask how many people they've slept with; you should also request full details of their past unsettled finances.
    1 Votes

    • 35x35
      Feb, 2012
      Bill
      First, your spouse will almost certainly need to file a tax return for the tax year indicated on the 1099.

      Second, whether a person has liability for a spouse's pre-marital debt depends on your state's laws. You indicated you reside in California. See the Bills.com resource California Loan Defaults and its comments for a discussion of this issue.
      0 Votes

    • 35x35
      Feb, 2012
      West
      Bill, Thanks. The spouse's transaction occurred in Florida. We've since relocated. Do you have any insight into that state? Also, I spoke with a tax professional who suggested that insolvency rules may benefit my situation. I don't have a clear understanding of how that works; would you kindly share your insight? Thank you!
      0 Votes

    • 35x35
      Feb, 2012
      Bill
      See the Bills.com resource Florida Collection Laws to learn about the rules in that state.

      The best resource Bills.com offers on CODI is found on this page. Follow our links to IRS resources learn more about Cancellation of Debt Income, and which forms to use. Alternatively, consult with a lawyer who has tax experience.
      0 Votes

  • 35x35
    Jan, 2012
    Mary
    After doing my taxes last year and sending them off I received a 2010 1099 for cancellation of debt. But the debt wasn't canceled until 1/11/11. So I contacted H&R block and they said I claim it for the year it was canceled. So I was going to claim it this year for 2011 taxes. Well all around December I get a letter from IRS saying I need to pay the taxes on that debt ($2300). I sent back a signed statement on to why I didn't claim it last year that It wasn't canceled off until 2011 so I feel that I need to claim it for 2011 income then. Plus I was never contacted from this place to begin with for payment until I looked into buying a house thats when they sent the 1099. Now IRS says that its a 2010 1099 so I was supposed to claim it then. I just don't see how I can claim income for 2011 in 2010. Please help.
    0 Votes

    • 35x35
      Jan, 2012
      Bill
      The document you receive on 1/11/11, should have been a 1099 for the 2010 tax year. I recommend that you review the document again. Show it to the H&R Block people who gave you the original advice. However, it may just be prudent to pay the taxes on the debt. In any case, you will have to declare the income and pay taxes on it in one year or another.
      0 Votes

    • 35x35
      Jan, 2012
      Mary
      But the date of cancellation was 1/11/11 so that should be income for 2011 not 2010.
      0 Votes

    • 35x35
      Jan, 2012
      Bill
      Since you stated that the document is a 2010 1099, I assumed that this was a 2010 tax issue and that is why the IRS claimed that it was income for 2010. I recommend that you speak with a tax professional. Bring the document and also ask about IRS form 982, which could be a way for you to avoid having to pay taxes on the amount listed on the 1099-C as income.
      0 Votes

  • 35x35
    Jan, 2012
    Richard
    Hi, I received a letter from the IRS that I owe $1,200 because I didn't report 1099 forgiven debt. I am trying to figure out if I am insolvent. I have a home worth $420,000 FMV and I owe on it $410,000 I owe $60,000 in credit cards. I own 3 cars total worth is $10,000 When i reply to the IRS do I send proof of all this? It doesn't give space on the 982 for itemization. Thanks and I love your site. Richard
    0 Votes

    • 35x35
      Jan, 2012
      Bill
      You can use the IRS link, as provided above on the page to access a worksheet to help you prepare the 982 form.

      I also recommend that you consult with a professional tax preparer to fill out the form and your tax returns, whenever a Form 982 is involved. If you can't prove that the IRS is wrong about its $1,200 assessment, I am afraid that you will have to pay them in full or set up a long-term payment plan.

      I am glad you enjoy and keep coming back to the Bills.com Web site.
      0 Votes

    • 35x35
      Mar, 2012
      Curious
      Review the scenarios in Publication 4681, they should help with pulling together your insolvency information.
      0 Votes

  • 35x35
    Dec, 2011
    Mark
    I was just granted a conditional student loan discharge. It will be discharged after the 3 year monitoring period. My student loans were over six figures. Will they send me a 1099c in the year the loans are discharged? They were with the Dept of Ed, now Nelnet is servicing them. And on the insolvency test for 1099c, can I use the amount of potential tax liability to show that I am insolvent.
    0 Votes

    • 35x35
      Dec, 2011
      Bill
      I recommend speaking with a tax professional, as only a tax professional can properly give tax advice. Also, because your potential tax liability would be large, it is even more important that you consult with a tax professional. You should discuss the IRS Form 982 and whether you should file that for the year that the debt is forgiven, even if you don't receive a 1099-C.

      You should also speak about IRS Publication 4681 and whether you meet the test for insolvency.
      0 Votes

    • 35x35
      Mar, 2012
      Curious
      Update us on how this worked out for you.
      0 Votes

    • 35x35
      Mar, 2012
      Mark
      Actually, it worked out better than expected. I received the 1099c this year and just had to submit the form 982 to exclude the potential income because of insolvency. Didn't have any income so that was the only reason I filed as I am on disability with SSA.
      0 Votes

  • 35x35
    Jun, 2011
    worried
    My relative is undergoing the foreclosure process and asked me for knowledge about this new law in his situation. He has refinanced about 8 times in the last 10 years and a couple times it was to reduce his payment because the rate went down, a couple to improve the house, and a couple to refinance debt. He paid down on the house 20% when he purchased it. Right now he owes what the tax value is, but we are almost certain it will sell for WAY less. It is in bad shape and falling apart. Which debt will be non taxable according to this new law? Will they just work based on the last refinance and compare the two? Thank mucho! We are so worried
    0 Votes

    • 35x35
      Jun, 2011
      Bill
      The balance of the present loan, and the market value of the property are the two key numbers to focus on.
      0 Votes

    • 35x35
      Jun, 2011
      worried
      Well im writing again in response to your answer. The tax value is around what is owed according to the loan, but we been told by relators that we should expect to get 40000-50000 below the amount listed on the tax value (aka fair market value, which is not equal to the property tax value). Unfortunately, it was a victim of hail storm and other problems which we could not afford to fix with the high deductible. Under the mortgage cancelled debt ACT which amounts will they assess? or what approximately should we expect to owe in taxes? Thank you!
      0 Votes

    • 35x35
      Jun, 2011
      Bill
      The market value matters. Get an estimated market value by looking at the recent sales prices of of comparable, nearby properties. A place to start online is Zillow.com.

      The tax value is significant only for the purposes of paying taxes, and nothing more. Unless you have a property tax issue, ignore the value the county tax assessor places on a property.
      0 Votes

    • 35x35
      Jun, 2011
      Worried
      Sorry if im asking you so many questions. I went on zillow and it said the current value is 130,000 and the loan amount is 175,000 right now. The original purchase price was about 120,000 almost ten years ago. We put about 10,000-20,000 into fixing it up in major repairs since then also. There is a foreclosed house about half a mile away selling for 85,000. Am I correct in thinking then: if the bank can sell the house for 60000. That leaves about 115,000 cancelled debt. And under this ACT, since about that much was spent purchasing and fixing it up despite multiple refinances- hypothetically it could be forgiven under this law? Thank you!
      0 Votes

    • 35x35
      Jun, 2011
      Bill
      I do not seem to be interpreting the Mortgage Forgiveness Debt Relief Act or how the IRS calculates the cancellation of debt income the way you are. Let us use a hypothetical example to illustrate how I understand both.
      • Mortgage Forgiveness Debt Relief Act: Homeowner has a $100,000 mortgage or deed of trust balance. He or she short-sells the property for $75,000, and the lender issues a 1099-C indicating the $25,000 deficiency balance is canceled and it will not pursue the borrower for the deficiency. Under the Mortgage Forgiveness Debt Relief Act, the $25,000 deficiency is not considered income because the property was the homeowner's residence.
      • Cancellation of Debt Income (CODI): Same facts; short sale resulting in a deficiency balance. If the homeowner/borrower is insolvent when the debt is forgiven or canceled, the forgiven debt is not income. This is a bit tricky, so review the analysis in the main answer above.

      No where in the IRS discussion of CODI or the Mortgage Forgiveness Debt Relief Act is, according to my reading and understanding, the inclusion of the homeowner's basis in the property (original purchase price), or improvements, or prior refinances of the mortgage in question. Your discussion of money spent on home improvements and repairs is not germane to either CODI or the Mortgage Forgiveness Debt Relief Act. If I overlooked allowances for repairs or improvements in my reading of either, I welcome your correcting my oversight.

      0 Votes

  • 35x35
    Jun, 2011
    Brian
    When calculating assets and liabilities in order to determine insolvency., I understand that 401ks must be counted but I'm wondering if the penalty can fee can be subtracted since in order to liquidate those, one would need to pay a penalty of 10%. For example, if you had a $50,000 401k and you withdrew it, you would on;y have $45,000. Would $45,000 be considered the FMV? Same for selling a home, can you deduct the presumed realtor fees and closing costs?
    1 Votes

    • 35x35
      Jun, 2011
      Bill
      You ask an excellent question. I can tell you that when it comes to determining a fair market value for a retirement account for qualifying for an Offer in Compromise, the IRS sets the value of the account at what you would have after the penalties and taxes are paid.

      Common sense would dictate that the IRS would use the same formula when reviewing an IRS Form 982 that is used for cancellation of debt. However, when it comes to common sense and the IRS, the two do not necessarily have to meet. I suggest that you address your question about both retirement accounts and real estate values to an experienced tax professional, in order to get an authoritative answer and best insulate yourself from unexpected tax liabilities. Please report back, if you get an answer that can be shared with other readers.
      0 Votes

  • 35x35
    May, 2011
    Carla
    I received notice from IRS that i owe $972+ from an old car repo (that was 1999) due to the COD of $6500+. it claims the IRS received notice for the 2009 tax year from the loan company. i never received any notice. what do i do?
    0 Votes

    • 35x35
      May, 2011
      Bill
      I have two suggestions:
      1. Review the IRS Form 4582. It is used to challenge a bogus 1099.
      2. Call the Office of the Taxpayer Advocate at 1-877-777-4778. The Advocate's job, according to the IRS Web site is "to ensure that every taxpayer is treated fairly, and that you know and understand your rights." Explain the facts of your case to the Advocate; that the 1099 is related to a car that was repo'd in 1999 and that the 1099 was not issued until 2009.

      Please report back on what you find out.

      0 Votes

  • 35x35
    Apr, 2011
    Barry
    End of Jan 2011 I received a 1099C - second mortgage cancellation from the financial institution. There was prior discussion relating to the debt cancellation. I tried to contact the financial institution several times to find out the reason for the cancellation, but there was no response. Also in December the collection calls stopped. I complete my tax return with the 1099C document. In the second week of April (last week) I receive a letter from the financial institution that they issued/mailed the 1099C in error and they have not filed the form with the IRS. The notice should be disregarded. So my question is where do I stand legally and are they trying to reinstate the debt if that is the case.
    0 Votes

    • 35x35
      Apr, 2011
      Bill
      Consult with a tax attorney who can:
      1. Determine the tax implication the reversed 1099-C has for you
      2. Research if you have a cause of action (a legal reason to file a lawsuit) against the vacillating lender.

      Mortgage servicers, as a group, are in such disarray that it is impossible to predict their behavior.

      0 Votes

  • 35x35
    Apr, 2011
    John
    We filed and were granted Chapter 7 Bankruptcy in 2010 for credit card and auto loan debts, which were all canceled in the bankruptcy. We received two 1099Cs from only two of the credit card companies for the amounts canceled with them, BUT they DID check Box 6 acknowledging cancelation of debt for bankruptcy. I realize we are not responsible for taxes on the canceled debts because of the bankruptcy. But do I have to still have to file form 982 or acknowledge these two 1099C forms in any way in filing my taxes? What about any of the canceled debt for which we did NOT receive a 1099C? Thanks so much!
    0 Votes

    • 35x35
      Apr, 2011
      Bill
      I advise you to speak with a reputable tax professional. My opinion- please note that word choice- is that you should include all debts that were forgiven in 2010 on the Form 982. The Form 982 is only valid for tax year 2010 until October, 2011. If you receive a 1099-C thereafter for 2010 or never receive one at all, you could face a tax liability that could have been avoided through the timely filing of the Form 982. I have seen many cases where the taxpayer did not even know a 1099-C was issued, only to be notified by the IRS years later that some income from a past year was not included on the return. The IRS adjusts the return and adds on the interest and penalty. This is very distressing to someone who thought that the debt was behind him or her.

      Any time there is a forgiveness of debt issue, I recommend that a taxpayer work with an experienced tax preparer, even if the taxpayer normally prepares his or her returns.
      0 Votes

    • 35x35
      Apr, 2011
      John
      Thanks so much for your time and quick response. Ya, I've heard mixed opinion/advice on this. I'll consult with our bankruptcy attorney and see what he says. Do you know if I need to report the 2 1099Cs on my tax return (there is a form to do that I see in TurboTax) and then file the 982? TT doesn't support filing the 982 form, so the problem with reporting the 1099c debt, at least through TT anyway, is that TT won't cancel it out and ends up figuring I owe much more than I should of course. Or can I leave my tax return as is, file electronically, and send the 982 in separately as a mail in? IRS doesn't make it easy (do they ever?!) as nowhere can I find that they say anything about what to do with a 1099C if bankruptcy box is checked, other than I don't owe taxes on it! Thanks again - you're very helpful!
      0 Votes

    • 35x35
      Apr, 2011
      Bill
      John, consult a tax preparation expert or attorney... but you could also choose to file your taxes without using TurboTax if the computer program does not support Form 982, if the amount in question is a material amount.
      0 Votes

    • 35x35
      Apr, 2011
      John
      Thanks. I actually was able to call in and get hold of the IRS "Complex Question" desk believe it or not! This person instructed me to not put anything on my 1040/tax return in terms of reporting the cancelled debt in anyway, since it was from a bankruptcy and acknowledged as such by the creditor on the on 1099C. However he DID say, as a safety measure, to go ahead and file the 982 form with my taxes (I'll have to mail it in) and that will cover me should any questions arise from the 1099Cs. I should NOT do this for any cancelled debt NOT reported on a 1099C this year, but may possibly have to do the same in future years, should I ever receive a 1099C in the future from any of the creditors. So I think I'll go with this since it's direct from the IRS' mouth. Nothing against going to a professional, and I totally appreciate/understand your advice to do so, but kinda hard at this point and I'd rather not incur the expense of course if I don't have to. The way I figure, the 1099Cs clearly show it was debt cancelled in bankruptcy, and IRS said that's what the 982 form is for to acknowledge/support that. So I guess I'll go with that. Hard for them to argue that I suppose! Again, greatly appreciate your help and timely repsonse! Just figured I'd post this for your knowledge and anyone else that may be wondering the same thing. :)
      0 Votes

    • 35x35
      Apr, 2011
      Joe
      Bill, I am trying to be free of all credit card debt. In doing so, I CLOSED one credit card account a little over 2 years ago so I can keep the interest rate low and locked in at 5.24%. I did this because my other credit card rates were increasing due to the new law and I really did not need to use this specific card any longer. I have been paying it off monthly sometimes the minimum, sometimes more. Lately, It has just been the minimum. The current balance for the card is around $7,000. My question is, am I able to talk to the credit card company and make a deal to pay off this card (no longer useable) without paying the FULL balance? If so, what would be an appropriate offer or deal? Finally, would this payment hurt my FICO score/credit card score because I would like to purchase a home in the future. Also, would I owe taxes on the reduced payment? I am just trying to figure everything out. Thanks so much!! Joe
      0 Votes

    • 35x35
      Apr, 2011
      Bill
      See the Bills.com resource Debt Settlement Advice to learn the basics of negotiating debt with a credit card issuer, or any other creditor for that matter.

      To get your account to a call center where the creditor will negotiate the debt, you must default, which will have a negative impact on your credit score. See Short Sale, Foreclosure & Your Credit Score to see how different events impact a credit score.

      Regarding taxes, financial institutions are required to issue a 1099-A or 1099-C for any debt canceled or forgiven greater than $600. See 1099-A vs. 1099-C for more information.
      0 Votes

  • 35x35
    Apr, 2011
    Katy
    Can a creditor attempt to collect a debt after they have issued a 1099-C form? I'm concerned about whether the original creditor or a debt purchaser can come after me even after the debt has been forgiven in the eyes of the IRS.
    0 Votes

    • 35x35
      Apr, 2011
      Bill
      Yes it can legally, but the chances of it doing so are unlikely. See the Bills.com resource Deficiency Balance to learn more.
      0 Votes

  • 35x35
    Apr, 2011
    Val
    Hi, Back in 2009 my wife was forgiven $6000 credit card debt by one the big banks. They issued a 1099c which we gave to our accountant and he filed form 982 for us and check the insolvency box. Yesterday I received a letter from the IRS letting me know we owe them $600 in taxes because we didn't file the 1099c. I called the IRS and told them we did file form 982 but didn't report the $6k as income because of insolvency and they told me I need to fill an insolvency worksheet and disclose all my assets and liabilities. Here is the issue, we've file jointly for the last 10 years, been married for 15 years, my wife is a stay at home mom, so basically she doesn't have any income. We consider all of our assets, (house, cars, furniture, bank accounts, 401k, etc) shared assets (If we divorce she will get 50% of everything). All the liabilities (credit cards, mortgage, car loans) are accounts under my name but she has 100% access to bank accounts, credit cards, etc. The mortgage it's under my name but her name it's in the deed. So the question is, should I list all the assets and liabilities as shared or do I have to list only her assets and liabilities? Thank you.
    0 Votes

    • 35x35
      Apr, 2011
      Bill
      It is not obvious to me, after reading Publication 4681, how the tax law views a spouse's ownership of assets in the situation you described. Consult with a tax attorney or tax preparation professional about your question.
      0 Votes

  • 35x35
    Feb, 2011
    consumer
    hi, i live in the state of california. my property is under water and my 2nd lien holder (deed of trust) issued me a 1099-c. i gave them a call to obtain a release or a reconveyance on said lien, to no avail, they said they can still collect in the future. is this true or are they just trying to scare the home owners who are struggling? is there any law that prevents lenders or creditors to collect once they have issued the 1099-c?do they relinquich their right to collect? if they do collect,is it unlawful?
    0 Votes

    • 35x35
      Feb, 2011
      Bill
      Is the junior a purchase money loan? If so, and there is a foreclosure, then California outlaws the collection of a deficiency balance.

      You defaulted on the junior and its servicer issued you a 1099-C. However, the issuance of a 1099-C does not release you from liability for the deficiency balance indicated on the 1099-C.
      0 Votes

    • 35x35
      Feb, 2011
      consumer
      thank you for your timely response. it is a purchase money 2nd and we are still trying to get our 1st loan modified, which means we are still residing in the property in question. do you think it is best for me to just go ahead and request for the full reconveyance on said trust deed and see if we we're actually forgiven on this loan? we have sent our hardship letter as well as our financial figures and we stated that we are aiming for a forgiveness on this loan. we never received any reply other than the 1099-c form.
      0 Votes

    • 35x35
      Feb, 2011
      Bill
      Read the Bills.com resource Negotiate Mortgage Settlement to learn one proven strategy for resolving a second mortgage debt.
      0 Votes

    • 35x35
      Feb, 2011
      Melissa
      Hi, I my mother co-signed for a credit card while I was in college. I have not used this card for 9+ years, but recently found out my mother had maxed it out. She would definately qualify for "insolvent". I paid a reduced rate, but am now receiving a 1099-C for the cancelled debt. Who should claim this? Should she since she is likely an exception given her insolvency? Melissa
      0 Votes

    • 35x35
      Feb, 2011
      Bill
      A lawyer experienced in tax law will give you an accurate answer to your question. I am not a tax lawyer, so I am incompetent to offer you useful advice other than suggesting you consult with a tax lawyer. My guess, note that word choice, is you will need to file a IRS Form 982 with your tax return. Again, consult with a tax preparer or tax lawyer for an answer more helpful than a guess. Damages you suffered as a result of your parent's misconduct may give you a cause of action for fraud.
      0 Votes

  • 35x35
    Feb, 2011
    Fatemeh
    On publication 4861, it mentions a person may claim insolvency if liablities was more than the FMV of all assets IMMEDIATELY before cancellation. My question is: what exactly does IMMEDIATELY mean? The day before, week before, month before? I ask because my BK discharged on 12/29/09 and lender forclosed on 01/06/2010. I would like to claim my credit card debt that was discharged. Is 6 business days considered "Immediate"? Thank you.
    0 Votes

    • 35x35
      Feb, 2011
      Bill
      Consult with a lawyer in your state who has experience in either tax law or bankruptcy. An attorney with this experience will either answer your question off the top of his or her head, or with a few minutes research cite the case where an appellate court decided what "immediate" means in a CODI situation.
      0 Votes

  • 35x35
    Jan, 2011
    Mary
    I have received a 1099 form from Capital One. I am on SSI. I don't make enough money to file for taxes. I don't own a home or have any assets. Do I still have to file for this?
    0 Votes

    • 35x35
      Jan, 2011
      Bill
      I strongly urge you to file a tax return, so you can properly account for the 1099 that you received from Capital One. Speak with a tax professional about the IRS Form 982. The Form 982 allows you to NOT declare as income the amount that was listed on the 1099-C for forgiveness of debt that you received, if you meet the eligibility requirements.
      0 Votes

    • 35x35
      Feb, 2011
      suzanne
      I recently received a cancellation of debt for $19424.66 (credit card). This was in my name. I am married. My husband has student loans under his name & his social for $50,000. We file our taxes jointly and have been married for about 5 years. The debt was canceled effective 12/31/2010. Since we are married am I able to use those figures when I do the insolvency worksheet?
      6 Votes

  • 35x35
    Jan, 2011
    Helen
    Hi, I received a letter from IRS stating I owe them money because of a cancellation of Debt in 2009. Over fifteen years ago I had some credit cards that I defaulted on. That's the only thing I could think of it being from. I never received a 1099c or anything else. I brought a house in 2005 and have perfect credit. Whats the statue of limitations on forgiveness of debt?
    0 Votes

    • 35x35
      Jan, 2011
      Bill
      There is no statute of limitations on canceled debt as such. The way the 1099-C rules are written is that the financial institution must issue a 1099-C for the tax "year in which an identifiable event occurs." See the IRS document Instructions for Forms 1099-A and 1099-C, and specifically the subheading "When Is a Debt Canceled" to learn more about what an identifiable event is.

      It is entirely possible either the issuer of the 1099-C or the IRS blundered and attributed some other person's 1099-C to you. This would be possible if your last name is common in the US, such as Smith, Johnson, Williams, Jones, Brown, Davis, Miller, Wilson, and so on. Ask the IRS to provide evidence of the phantom 1099-C so you can investigate this possibility.
      0 Votes

  • 35x35
    Jan, 2011
    jax
    hi bill, we just received a letter from IRS saying that we did not file our 1099c on 2008. when we filed for our income tax, unfortunately, our accountant did not include our 1099c. Now, IRS is hunting us. We owe $600.00. Another that we don't get is Sallie Mae we paid off all our debts in Sallie Mae. We don't understand why we have 1099c (cancellation of debt). I'm thinking we paid it all off on year 2008. During 2007 we been paying and trying to get rid of our debt through sallie mae..please help us..we don't know what to do, we can't afford 600 dollars specially now we are jobless. can we still file 1099c for this coming income tax. hope to hear from you soon..thank you!
    0 Votes

    • 35x35
      Jan, 2011
      Bill
      First, consult with the accountant who failed to submit the 1099-C with your 2008 income tax return. If he or she had the 1099-C, the forgiven debt should have been included in your income tax calculations for the appropriate year. If the accountant was negligent when preparing the tax return, then he or she may have liability for any penalties you must pay. Second, you need to review your financial records to determine if a 1099-C should have been issued to you. If the debt was paid in full, then no 1099-C should have been issued. However, if you negotiated a settlement with the creditor, and the creditor is considered a financial institution, then the creditor must issue a 1099-C for any debt larger than $600. Finally, you may be able to file an amended return, but only do so after consulting with your accountant or a tax preparer.
      0 Votes

    • 35x35
      Feb, 2011
      jax
      hi bill, we contacted the CPA that prepared our 2008 tax return. he refused to listen or even help us to resolved the problem. every time my husband tells him something he just shut him off and told him just pay for it and its $600 dollars. we told him the reason why we go to accountant to do our tax its because we don't know how to do it and that's why we pay them to do our tax. and everything that needs to be filed are all in the folder. again he said, "just pay it". we called IRS, they just gave information how to pay it. is there any way that we can still file 1099c with our 2010 tax?
      0 Votes

    • 35x35
      Feb, 2011
      Bill
      Consult with a different tax preparation professional or CPA about your questions. Look for one with the time and patience to answer your questions more thoughtfully.

      However, a CPA is not obligated to give each customer a complete tax preparation seminar. If CPAs did so, their fixed-rate fees would be much, much higher, or they would bill customers at an hourly rate. Either way, you would pay more for his or her services.

      Without knowing more about your circumstances, I cannot answer your question about the 1099-C.
      0 Votes

  • 35x35
    Sep, 2010
    Bill
    I recommend that you look at the IRS Form 982 and speak with an accountant or tax professional. The Form 982 covers Reduction of Tax Attributes Due to Discharge of Indebtedness. Ability to properly use the Form 982 is based on an analysis of your assets and liabilities. Because it can be complicated and because the potential tax liabilities are large, it makes sense to speak wtih a tax professional. You referenced the federal law about mortgage debt forgiveness in your comment, but you may want to read more about it. The Mortgage Forgiveness Debt Relief Act and Debt Cancellation provides tax relief for some loans forgiven in 2007 through 2012. See the IRS document "The Mortgage Forgiveness Debt Relief Act and Debt Cancellation" and the Bills.com document Mortgage Forgiveness Debt Relief Act to learn more.
    0 Votes

  • 35x35
    Aug, 2010
    ginnie
    i am in the process of waiting for a short sale approval. first loan on house is 185K. short sale amt pending approval is 100k. i am assuming given this scenario, my forgiven debt is 85K which should be exempt from taxes due to the Mortgage Relief Act. However, there is an equity line for 47K (of which was not used for improving the house and therefore should be taxable once forgiven). But i have heard that i can also get this excluded from taxability using the insolvency exclusion. Can you help explain how this works?
    0 Votes

  • 35x35
    Feb, 2010
    Bill
    A short pay refinance is where the debtor finds another mortgage for less than the present balance of their current mortgage. The debtor then goes to the present mortgage holder and gives it a choice -- accept a pay-out at less than the balance or the debtor will walk away from the property whereby the mortgage holder will be forced to foreclose and risk not recovering the deficiency judgment. There is no 1099 in a short pay refinance because there is no forgiveness -- the pay-out is an accord and satisfaction. The legal distinction is slight but significant.
    1 Votes

  • 35x35
    Feb, 2010
    Darrell
    My mortgage company accepted a payoff amout which was over $67,000 less than I owed as part of a Short Pay refinance. I still own the home. They said no 1099 will be issued for that amount. Does that mean I don't have to file form 982? Does that mean the debt is not "forgiven"?
    0 Votes

  • 35x35
    Feb, 2010
    Bill
    Yes, you need to include your pension. See IRS Publication 4681 for examples of how to calculate insolvency, including pensions. In a nutshell, you need to determine the present fair market value of your interest (i.e., ownership) in your pension plan.
    0 Votes

  • 35x35
    Feb, 2010
    Joan
    I am retired. Do I have to include my social security income and my NY State Retirement Pension when determining insolvency? If so, how do you determine value of Pension.
    0 Votes