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Taxes, 1099-C's, and IRS payment Plan: Does the following strategy make sense?


slavenomore
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Taxes, 1099-C's, and IRS payment Plan: Does the following strategy make sense? 

 

 i am in a bit of a pickle when it comes to taxes this year. 
and having trouble figuring out what is the smart thing to do. 

Questions: 

1) Is it smarter to file in April or file for an Oct. extension given my current situation? 

2) Does the below strategy make sense? Have I forgotten anything? 

3) How does this situation affect my state taxes?

4) Are all the documents listed that I would need to bring to A tax meeting ? Have I forgotten anything? 

__________________________________________________ ____________

CURRENT SITUATION: 

1) I have an IRS payment plan for the last two years. Currently it is at $45 a month. for 2011 and 2012 for a total of $6,500 

2) I have had a bad last few months and I will not have the April 15th amounts due the IRS, or even possibly the state for this year either. 2013. est: 3-5K

3) I received three 1099C's debt forgiveness (code G) this year (2013). If I do not declare insolvency I will owe tax on these. I qualify for Insolvency. 

4) I dont know if it is smarter to do all of this in april, or file and extension and do it in October. 

__________________________________________________ ___________________________

THE SCENARIO THAT SEEMS TO MAKE SENSE: 

1) Fill out form 982 attach to 1040 and declare insolvency to not pay taxes on the 1099-C's 

2) Do taxes and send to IRS and state without payment. 

3) Call IRS and state and make a new payment plan. 

4) The other option is to file an extension for October and hope I can come up with more tax money by then and keep paying $45/m. 

__________________________________________________ _______________________________
INSOLVENCY

1) My three 1099-Cs show a cancellation date of 2013 with a code G 

2) Use the insolvency worksheet included in the 4681 Publication 

3) Download IRS Form 982. I will need one for each 1099-C. 

4) . The cancelled amount indicated on your 1099C Box 2 enter on line 21 of your 1040 enter 'Cancellaton of Debt' for 'type' 

5) . Check box 1b on form 982 (pay no attention to the 'not in a title 11 case') enter the amount from 1099C Box 2 on line 2 of your 982. You need to file a 982 for each 1099C but only enter the total from all on Line 21 1040. IRS needs seperate 982's to match up the totals from their copies of the 1099Cs.

6) . Attach all 982's to your 2013 federal tax return

7. Keep the worksheet from Publication 4681 - if you are audited your will need documentation of how your arrived at insolvency

8) . Keep the copies and the original 1099C, you don't need to attach the 1099C to your return just have it on hand

http://www.irs.gov/Forms-&-Pubs

__________________________________________________ __________________________________________________ ________________________________________

LIST OF THINGS TO BRING TO TAX MEETING: 


TAX DATA: 
Sole proprietor 
2 Main bank accounts. 1 biz, 1 personal
HSA - that was not withdrawn from.
no property. 
car - no payments. 
rent 
Have payment plan with IRS for 2011 & 2012

GATHERED INFO THAT IS READY TO BRING TO ACCOUNTANT MEETING: 
1) 
biz Account 
personal Account
ING 
HSA
IRS PAYMENT PLANS
TRANSCRIPTS FROM PAST YEAR.\
Year end tax data from bank 

2) QUICKEN FILES RECONCILED: 

ACCOUNTS:

BUSINESS ACCOUNT
1) QIF file. 
2) register printed out for year
4) itemized report
5) catagories report
6) profit and loss report

PERSONAL ACCOUNT
Qif file
1) register printed out for year
2) itemized report
3) catagories report

INSOLVENCY SHEETS:
1099-cs 
1040
982's 
Worksheet showing insolvency

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The form for an automatic extension is IRS 4868.

I'm not from IL but I did find this:
 

Your Illinois filing period is the same as your federal filing period. We will assume that you are filing your Form IL-1040 for calendar year 2013 unless   you indicate a different filing period in the space provided at the top of the return. The due date for calendar year filers is April 15, 2014.

We grant an automatic six-month extension of time to file your return. If you receive a federal extension of more than six months, you are automatically allowed that extension for Illinois. These extensions do not grant you an extension of time to pay any tax you owe. If you determine that you will owe tax, you must use Form IL-505-I, Automatic Extension Payment for Individuals, to pay any tax you owe to avoid penalty and interest on tax not paid by April 15, 2014.

MyTax Illinois is an easy way to pay your IL-505-I payment. WebPay is still available. If you do not expect to owe tax, you do not have to do anything.

 

 

 

The 4868 must be filed before April 15, 2014, even if you don't have the money to pay the taxes.

There will be late fees, penalties and interest for not paying by April 15th.

If insolvent as I understand it you DO NOT enter any amount on Line 21 of your 1040.  The 982 excludes the income from tax liability.

You must file an IRS 982 for each 1099C you are excluding for 2013.  You DO NOT attach the 1099C but must attach each 982.

Keep the worksheet from publication 4681 and all correspondence and all documents pertaining to your taxes.

I assume you will be notified if the insolvency claim was denied or approved.

You will be notified at a later date and you will have 30 days to call the IRS to set up a new payment plan. 

You can only have one payment plan with the IRS, so a new one will be refigured and a new amount will be due.

Personally I  would wait for the IRS to request a sit down and they will inform you what forms you will need to bring. 

After the initial meeting they may request more information and documentation but let them decide.

 

AGAIN VERY IMPORTANT:  KEEP ALL CORRESPONDENCE and DOCUMENTS

 

For your situation hiring either a CPA or Tax attorney may be in your best interest.

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Thank you so much I very much appreciate it. 

 

interesting about line 21. 

 

Do you have any tips for renegotiation of an IRS payment plan? 

I had 3 years of taxes owed at one time.  The total was over $14,000.   It's only been in the last 3-4 years that I was able to have a refund.  It usually was my fault.

 

Whenever I negotiated with the IRS I had one tenet that I followed.  They are in charge and they want to get you right with your obligation.  So, treat them with respect.  They have some latitude and usually will work within your budget.  It's up to you to determine how much you can afford to pay them.  I've heard horror stories and dire warnings from others about how much trouble you are in.   But realistically the interest is better than borrowing it from a loan shark or credit card.  The IRS usually doesn't place a lien on your credit report unless there are reasons that they deem as risk  or non payment. Things such as not filing or fraud will probably get a lien.   My home state would place a lien until the tax was satisfied so it became a goal to negotiate with the IRS and pay my state taxes every year I owed, which was often.

 

Remember once you arrive at an agreed payment make sure you pay the payment on or before the due date.  They used to have an auto pay option but the last time (2004) I  needed a payment plan they said it was no longer available.  You will get a payment notice usually 10 days before the due date.  Don't ignore it.  They have unlimited power to collect.  The IRS is exempt from bankruptcy relief, they only want their money.

 

As for Line 21 there is nothing I could find about the proper way to fill it out.  I found a site run by a tax attorney that pretty well explained the process to my understanding and they indicated that the 982 basically nullified the tax liability on the 1099C IF YOU WERE INSOLVENT.  The 982 shows the amount you are excluding and if it matches the amount claimed in Box 2 of the 1099C then they have a match.  The decision to approve or deny the claim is up to the examiner who evaulates your return.

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  • 2 weeks later...

Wow, I want to thank you so much for all your good info.   I was delayed from answering by medical issues. 

 

  If I can't pay my taxes by April 15th, and I have an IRS payment plan already. 
What is the difference between the penalty and interest if i file an extension that gives me till oct. Vs filing april 15th but not paying?
 
1) If I cant pay the new taxes anyway.  
2) Which will default my current IRS payment plan  
3) If I file and extension and meet with my CPA after April 15th. 
 
question:  is there any other XTRA  penalties or interest added because i filed an extension, if so how much more ? 
trying to see any downside to not doing it by the 15th even though i don't have the money for the taxes.
 
Thanks for the clarification.   
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Answers: 

 

Pay them now or pay them later it will probably be a wash.  The extension will only buy you more time but the penalty and interest will be the same come Oct whether you file and don't pay or request an extension and don't pay in Oct.  Either way you're going to have 6 months int and penalties.  Filing an extension let's you deal with them 6-8 months from now otherwise within the next 2-4 months by filing and not paying. 

 

It will not jeopardize your insolvency because you are reporting on the same information now or in Oct.

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If it were me--and it's not--I'd file now, not pay, if I didn't have the money, and the second I filed, I'd be on the phone, calling to tell them I was a)not able to pay this year and b)want to set up a payment plan ASAP to include the taxes I couldn't pay right now.

 

If I owed $5000, and could pay $2000 now, I'd pay the $2000 so they'd see I was bargaining in good faith. Not to mention the fact that 3K arrears generates less interest to have to pay than 5K.

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Good advice here with exceptions

 

If it were me--and it's not--I'd file now, not pay, if I didn't have the money, and the second I filed, I'd be on the phone, calling to tell them I was a)not able to pay this year and b)want to set up a payment plan ASAP to include the taxes I couldn't pay right now.

 

The IRS is not you normal collection agency they can only respond to the facts that are in the system, if your return has not been processed then they have no way to set up a plan.  It may also jeopardize the existing plan that is in place.  If you file now you will need to wait until the IRS has processed your return and notified you of a balance owed. 

 

If I owed $5000, and could pay $2000 now, I'd pay the $2000 so they'd see I was bargaining in good faith. Not to mention the fact that 3K arrears generates less interest to have to pay than 5K.

 

If you have any money to send them on Apr 15 then make out a check and attach it to your return with the notation to apply it to your 2013 taxes.  It will save you some interest and penalties as she stated.   But keep paying on the existing plan until you have contacted them to start another payment plan.

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  • 2 weeks later...

thank you so much for all your help.  there is so much to learn! 

 

how do you determine what the amount of insolvency is to claim?  For instance is if the date on the 1099 c's are 4/1/13  

that means I have to claim insolvency the day before that (3/31013) correct?  Does that just mean my bank accounts? I mean How do I determine what that was from a whole year ago? Thx!

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thank you so much for all your help.  there is so much to learn! 

 

how do you determine what the amount of insolvency is to claim?  For instance is if the date on the 1099 c's are 4/1/13  

that means I have to claim insolvency the day before that (3/31013) correct?  Does that just mean my bank accounts? I mean How do I determine what that was from a whole year ago? Thx!

I can only answer for my situation and my interpretation of the reporting requirements of the 1099C.

 

For years I have maintained a financial budget using a spreadsheet application that also included a balance sheet below to show my net worth, I use 2 columns or sections - 1 for assets and 1 for liabilities.  Bookkeeping is a personal thing and what works for you may or may not work for others, if you understand your method then use it.

 

On the asset side (left) list the replacement value of all your hoursehold items, autos (trade in value), personal items (fire arms, collections, RV's, tools), equity in your home and other real estate's equity.  Redeemable value of your whole life insurance (if any).  Any savings, bonds, stocks, cash on hand or in the bank,,,etc.  If you have any equity in a business (personal, family, partnership or corporation) including income/wages owed. 

 

On the liability side (right) list all your loan balances (including auto, personal and CC's), medical bills, any outstanding rent or late mortgage payments,,,etc.  Any judgements or liens, taxes owed (fed or state) .  Current utilities are usually not included but if you have any old balances then they are a liability.  I have a .PDF file for each month and the net worth figured (column 1 minus column 2 - negative, you're insolvent positive you're not).  I used the final for the month that was dated on the 1099C as my benchmark.  You don't need to send any of the information with your return, but keep it handy in case of an audit. 

 

For your 1099C I would use the final for April 2013.  Just be consistent and above all else honest!   

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Thank you so much for the info that helps to clear up what the balance sheet might look ilke.  I appreciate it. 

 

Thanks for your patience, and my questions, but I am trying to get this right. 
 
and to wrap my head around this, 
 
 If i have multiple form 1099-cs,  from the same OC,  say on 4/10, 4/11, and 4/12 2013,  I can't just declare my insolvency date on 4/9/13 and include all 3?
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I've been looking, and I really can't find anything that defines "date of insolvency".  My guess would be since like all other income, 1099c income would be for that entire year...therefore insolvency would be for that entire year. In other words, total your assets and liabilities as of 12/31/2013.

 

Anyone know if this is correct?

 

I just reread the instructions in Pub 4681.  The "Insolvency Worksheet" on page 8 does have "Date debt was canceled" as the first box to be filled in.

 

So...if you get multiple 1099c's for the same year with different dates, the implication is you need to go thru the Form 982 exercise multiple times.

 

I do wonder what the IRS's reaction would be if you got a 1099c dated 7/31/2013 and then won the lottery on 8/1/2013...

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Thank you so much for the info that helps to clear up what the balance sheet might look ilke.  I appreciate it. 

 

Thanks for your patience, and my questions, but I am trying to get this right. 
 
and to wrap my head around this, 
 
 If i have multiple form 1099-cs,  from the same OC,  say on 4/10, 4/11, and 4/12 2013,  I can't just declare my insolvency date on 4/9/13 and include all 3?

 

You need to fill out a 982 for each 1099C you are claiming insolvency for.  You only have to prove insolvency once to cover the 3 1099C's if they are for the same year and month.  Remember you don't enter any total on Line 21 because of the insolvency claim but each 982 HAS to be attached for the reporting year!

 

I realize it's a muddled mess, but until the IRS clears it up (good luck with that) I am going ahead and report any other 1099C's as I did for 2013.

Say you go to Vegas and play Keno in January and win a single ticket for $2500.  The casino will either hold out the taxes at that time or take your name, SS and address down to enable them to issue you a W-2G.  You have to report that as income on Line 7.  If no W-2G is issued and the taxes have been withheld then there is no reporting requirement.  But if you get a W-2G and you itemize then you can deduct any gambling expenses to offset that win up to the total won, no amount above that is deductible.  

Now if you are like most gamblers you will go back to Vegas to test your luck.  Most likely you will give it all back and then some.  BUT, if you win more later in the year that amount now becomes income whether a W-2G is issued or not and should be reported (line 7 or 21) again itemizing the expenses on your schedule A.  

If you itemize, you may deduct gambling losses up to the amount of your winnings. HOWEVER, the rules for deducting gambling losses are rather draconian and most folks can't deduct them. You must keep a detailed written diary or log of ALL gambling activity for the entire year. You must have corroborating evidence to back up your diary, such as receipts or other evidence of the amounts wagered, lost, and won. (Forget gathering up stacks of losing lottery tickets or other betting slips. Without receipts that prove that you purchased them they will not be accepted at audit.)

If you don't itemize, you can't deduct gambling losses. If you do claim a deduction for gambling losses, have your documentation handy as an audit is highly likely. Most folks don't keep the required documentation and wind up with the deduction being disallowed.

You can't claim insolvency for gambling winnings, probably a contributing factor to your insolvency is the fact that you gamble.  Insolvency is an accepted exemption for a 1099C.  It's available whether you itemize of don't itemize.  

Therefore once again RECORD KEEPING is the most important function you do to get a 982 accepted and owe no taxes on the 1099C!

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