Booger Posted March 19, 2008 Report Share Posted March 19, 2008 Client received assessment letter from IRS re cancellation of debt on residence. Client filed bankruptcy (which chapter number I will find out on saturday when I meet with them). Client NEVER received the 1099-C, but apparently the IRS did. After reading PUB 908 (Bankruptcy Tax Guide), I believe that it does not matter what chapter number the bankruptcy was filed under; simply by filing bankruptcy the amount reported on the 1099-C is not taxable income. My question is how to respond to this notice. Do I enclose a copy of the bankruptcy paperwork along with the copy of the notice? Booger Quote Link to comment Share on other sites More sharing options...
jainen Posted March 19, 2008 Report Share Posted March 19, 2008 >>simply by filing bankruptcy the amount reported on the 1099-C is not taxable income<< Not true. The bankruptcy exception ONLY applies if the specific debt was discharged by court order. That doesn't necessarily happen in Chapter 13, and even in Chapter 7 secured debt is the last to go. There could also be any number of reasons the debt was cancelled before, after, or otherwise outside of the court proceedings. Quote Link to comment Share on other sites More sharing options...
Booger Posted March 19, 2008 Author Report Share Posted March 19, 2008 >>simply by filing bankruptcy the amount reported on the 1099-C is not taxable income<< Not true. The bankruptcy exception ONLY applies if the specific debt was discharged by court order. That doesn't necessarily happen in Chapter 13, and even in Chapter 7 secured debt is the last to go. There could also be any number of reasons the debt was cancelled before, after, or otherwise outside of the court proceedings. Thanks jainen. Will look at their paperwork on saturday. Booger Quote Link to comment Share on other sites More sharing options...
BulldogTom Posted March 19, 2008 Report Share Posted March 19, 2008 Jainen is right. You will have to prove that the client is insolvent just before the cancellation of debt. Only the amount to which the client is insolvent is eligible for exclusion. For example, if the client has 2 million in assets and 2.2 million in debt, he is insolvent by 200K. If the cancelled debt is 300K, only 200K is excluded from income. A word to the wise is to do the calculations now, before you file the return. Trying to do this in 2 years when the taxpayer has forgotten about it is not going to be fun. This is where we need to educate our clients. Don't let them say they are broke, they will forget about momma's jewlery and daddy's gun collection they inherited. Make them list everything. They should have done it for bankruptcy court, so it shouldn't be too hard. Just my 2 cents. Tom Lodi, CA Quote Link to comment Share on other sites More sharing options...
zeke Posted March 20, 2008 Report Share Posted March 20, 2008 Janine & Bob are correct. Dot the I's & cross the t's as you go. Unfortunately we get new clients & their baggage you cannot control. Last year I had to use my "crayon defense". Two times in 40 years I have had the client borrow one of the kids crayons & tear out the side of a paper bag & pen their own excuse(s) in their own vocabulary & spelling. Both times the IRS just closed the file! :wacko: Quote Link to comment Share on other sites More sharing options...
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