Haven't seen this in any other threads (IRS 982)

[tx3amigos]

I got into my mess when I moved back to Texas and couldn't sell my home in North Carolina for two long years. I didn't want a foreclosure on my records so I let the credit cards go so I could keep on making house payments until it finally sold. All credit cards went into collections during the last few months. One of them, RBC Centura, sued me. I owed them $8000 and they settled out of court (with the help of my lawyer)for $4900. The unpaid balance ($3100) is being sent to the IRS and I will receive a 1099 for the $3100.

This is what I haven't seen in any posts:.........

I'm going to file an IRS form #982 (on the $3100)and claim insolvent. This lows the amount of taxes I have to pay on the $3100. Hopefully I'll only pay taxes on a % of the $3100. (Not sure what % I'll pay)

Has anyone else settled a debt , received a 1099 on the "unpaid 'balance, and then used the IRS form 982 ????

[willingtocope]

According to the latest IRS rules, a creditor who "forgives" all or a portion of a debt should issue a 1099c for that amount. They're required to send it to the IRS...the rule is a little unclear as to whether they're required to send you a copy. Amounts under $600 do not require them to send you a copy.

However, regardless of whether you get the 1099c or not, you are required to report the "found income" to the IRS and pay taxes on it.

And, yes, you may be able to claim insolvency using the IRS form you mentioned. However, note that the IRS's rules for whether you're insolvent or not are fairly strict. Basically, if you have income...you're not insolvent.

(One of the scams that debt fixers push is...you add up your assests, subtract your liabilities, and if its less than zero, you're insolvent. The IRS doesn't see it that way).

[flacorps]

Keep in mind that in doing these settlements you can put into the agreement that the settlement is of a doubtful and disputed debt, yada yada, and that no form 1099c shall be issued by the creditor ... you could even put in a damages clause that would have them pick up the tax, interest and penalties if they were to somehow issue a 1099c later (accounting departments do foul up). It's just a matter for negotiation. How far will they go to get the money?

And for anyone who is going to have to live with that 1099c, a 982 form with instructions is available on the IRS website (irs.gov) to look at in advance and get an idea where you're going to stand when the dust settles.

[lostindebtinVT]

I have researched this extensively because I will be negotiating some debt settlements. In order for you to claim you are insolvent you have to go back to the time of the settlement - what were your assets and what were your liabilities? If you assets exceed your liabilities you have to claim the forgiven debt as income, if your liabilities exceed your assets - then you get to deduct that amount. Otherwise, if you had assets totalling $15,000 and your debts were $20,000 - you would not be taxed and are insolvent to the tune of $5000.

When making a settlement it is important to negotiate that the interest from last payment, late fees and over limit fees be waived from the amount owed, otherwise, when the creditor does the 1099C they will include that 30% interest over six months and $78.00 a month late fees and overlimit fees and you will pay tax on that as well.

Final note, when figuring your asset position, you need to use the fair market value of your possessions. On cars use Kelley Blue Book, on real estate use your assessed value or last appraisal.

In December 2007, Bush has signed a bill that will help with Primary Residence foreclosures and the forgiven debt to certain individuals, this should help many people facing foreclosure and is one of the tax breaks to help stimulate the economy.

[brokeinok]

Incorrect, from everything I've read, 1099's on a forgiven debt are to be principal only. You aren't taxed on the fees and interest.

[lostindebtinVT]

The interest is a problem when it's 30% - I'm going to call the IRS before I do anything ... they don't make anything clear. I called them and asked them if a 401k needs to be counted as an asset, it took them a week to get back to me and they said yes. The reason I asked is because if you file bankruptcy they don't count your 401k and you are exempt for $75,000 on your primary residence but they won't let you do that on a 982.

[willingtocope]

Incorrect, from everything I've read, 1099's on a forgiven debt are to be principal only. You aren't taxed on the fees and interest.

The 1099c form has a field for them to show the amount of interest included in the amount canceled. The instruction for the OC to complete the 1099c gives them the choice of whether to include interest or not. Its unclear as to where the debtor has to include both boxes in reporting income.

Its also unclear as to whether the "insolvency to the extent not include in a chapter 11 BK" line in the form 982 instructions applies to forgiven CC debt. My tax lawyer told us that his understand was that to be insolvent for this to apply, you would have had to either file for BK 7 or qualify for BK 7 (as opposed to BK 13) according to the income requirements of your state. In other words, if you've got income coming in, you probably don't qualify.

Like all IRS rules and regulations the utlimate deciper of this gibberish will have to be done by the courts.

[willingtocope]

Okay, sports fans, here's good discussion of the whole 1099c issue...http://www.taxworkbook.com/files/2006%20-%20chap%201IndividualFINAL.pdf from The Land Grant University Tax Education Foundation. I have no clue as to whether these people know what they're talking about, but, its an interesting read.

They do point out that the full amount shown on the 1099c (which should include penalty and interest) is taxable unless the amount show in the "interest included in" box would have been deductible for the taxpayer. Since CC interest is not deductible...the whole amount is taxable.

They also point out that the "insolvency" claim may work...but...its determined by federal bankruptcy laws (not state laws) and fed BK law does not allow exemptions or anything of the sort. In other words, like I said, if you don't qualify for a BK 7, its taxable.

Happy reading!!

[brokeinok]

They do point out that the full amount shown on the 1099c (which should include penalty and interest) is taxable unless the amount show in the "interest included in" box would have been deductible for the taxpayer. Since CC interest is not deductible...the whole amount is taxable.

Thanks for the link willing..... like I didn't have enough stuff to read about already!

If the charges were the result of a business or work expense, then you can deduct the interest. I guess what we are all trying to say is that no one knows for sure and everyone's tax and deduction situations are different so there is not a hard and fast answer that would apply across the board.

[willingtocope]

If the charges were the result of a business or work expense, then you can deduct the interest.

Business related or employee expense...hmmm...yeah, probably, but the business expense would have to go on your Schedule C which might not be able to offset personal income.

Ah, geez, I get a headache just thinking about. There has to be a better way of paying for a government...

[brokeinok]

schedule c losses are reported on a line which ultimately reduces your adjusted gross income in the sole-proprietor situation, doesn't work for partnerships, S-corps and the like.

i'm not an expert or a CPA, but i've been doing small business tax returns to earn extra money for about 10 years.... the rules are a nightmare and the forms can cause a grown man to break down in tears.