Cancellation of Debt – Can you avoid the taxes?

By
Services for Real Estate Pros with Backoffice Squared

I represent taxpayers in Gainesville and the state of Florida who have tax issues with the IRS and Florida Department of Revenue. You think you see the light at the end of the tunnel when your creditors write-off your debts to them as uncollectable. But suddenly, there is another train heading your way. The write-off itself is taxable income.

All financial institutions such as banks, credit unions, and any organization in the business of lending is required to issue a Form 1099-C in the year that a “recognizable event” occurs and the amount of cancellation is $600 or more. If you get one of these, please understand that the IRS has also received a copy and they will eventually try to match it against your return. Even if you don’t receive a 1099-C, it would be a good idea to report any cancellation of debt that you know of because it is quite possible that the IRS did get a copy and you didn’t.

So, what is a “recognizable event” that triggers the requirement to file 1099-C? Here are the most common:

  •          Discharge in bankruptcy under Title 11
  •          Cancellation or extinguishment in a court action such as foreclosure
  •          Expiration of the Statute of Limitations to collect the debt
  •          Discharge under an agreement between the debtor and the lender
  •          Discharge due to the lender’s policy to give up on the collection effort because they determine it is uncollectable
  •          Lender has not received a payment for the prior 36-month period ending on December First

If you believe that a 1099-C is in error, then the first step is to contact the lender and see if you can get them to correct it. Failing to accomplish that, report it on your tax return so that it will match the 1099-C and then deduct it and provide an explanation.

One of the confusing things is that you might also receive a Form 1099-A Acquisition or Abandonment of Secured Property. This form is used to report the amount of credit that was applied against your mortgage for property that was foreclosed or signed over to the bank.

Cancellation of Debt income does have some exemptions including bankruptcy and debtor insolvency. I will write about these exceptions in my next post

If you or someone you know has received a Notice of Intent to Levy or some other federal or state tax issue, please feel free to contact me at either (352) 317-5692 or email jim@backoffice2.net.

 

Jim Payne, CPA

Backoffice2

Gainesville, FL

Cell (352) 317-5692

Office (352) 376-9401

Fax (352) 376-9440

jim@backoffice2.net

https://backoffice2.net

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Jim Payne, CPA

CPA firm practicing in the area of IRS Collections
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