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debt settlement, 1099's, and IRS!


jeffr
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Ok...

Between MBNA, Discover, and National City, I'm going to have to claim roughly $10,000 on my taxes this year. Is there any possible way of getting around this? How can I prove insolvency? My wife has a full-time job. i have a full time job, plus a small business. My business makes an extra $3,000-$4,000 a year for my wife and I. Nothing big, does anyone have any ideas?

Thanks!

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No way out, I'm afraid. If your Income Tax Return shows income, you'd have to prove that your everyday living expenses exceed that. And the only proof I know of that they'll accept is BK.

The good news is (if there's any good news involved) is that the IRS will usually accept payments. I'd suggest you do your taxes...see what the damage actually is...send the return in with a balance due (if you have to) and wait for the first letter from the IRS. When it arrives, call and see what you can arrange. You might also look at increasing your withholding immediately so that you can show evidence that you're trying to resolve it.

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But is it not true that if you deemed not insolvent, you are only liable for the amount that you are not insolvent by?

For example:

Assets=10,000

Liabilites=9,500

Not totally insolvent by $500

Aren't you liable to pay taxes only on $500 of the imputed income listed on the 1099?

Just wondering...someone had explained this to me before.

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I read that you are responsible to report the debts forgiven even if no 1099 is issued.

This in my mind implies that the CCs are violating the law by not issuing 1099s.

I received a letter of inquiry from MBNA regarding my settled account. They wanted to know my taxpayer ID, whether I am an individual or a business.

Looks like my 1099 is on the way.

Gettinout

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Gettinout: I'm not sure if you have to report before the 1099c arrives. It would be great if that were the case, because the taxes are due in the year in which the debt is forgive. I've read of cases where the creditor kept a debt on their books for years before finally writing it off, and then issued a 1099. The IRS charged penalty and interest from the original charge off date.

Again, read the IRS instructions I mentioned above. Things have changed.

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This link goes directly to the 1099c instructions.

http://www.irs.gov/instructions/i1099ac/ar02.html#d0e196

If a federal government agency, certain agencies connected with the

federal government, financial institution, credit union, or an organization

having a significant trade or business of lending money (such as a

finance or credit card company) cancels or forgives a debt you owe of

$600 or more, this form must be provided to you.

The long version clearly states they must issue a 1099c when a debt is canceled and the qualifying events are defined. Charge off is not listed as a qualifying event.

Also included are exceptions for submission of 1099c and exceptions for reporting as income. My interpretation is that debt incurred as a true business expense doesn't have to be reported. This is significant since many of us around here have debts which are business related.

Seems that a good accountant could use much of the exceptions to our advantage.

Gettinout

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I really would like an accountant's opinion...or a lawyer's for that matter.

There has been at least one court case (which of course I can't put my finger on) where the judge found for the debtor saying that it was unfair for a JDB to collect as a "debt" something that the IRS considered income and that the debtor had paid taxes on.

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  • 1 month later...

This has been a hot topic over on CB and AoC, with a lot more discussion and a lot more light shed.

Insolvency doesn't necessarily equal bankruptcy. Form 982 is where you work out whether you are insolvent, and by how much. The debt forgiven is only income to the extent you become solvent after the debt forgiveness.

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