If you have received a 1099-C, DON'T PAY THE ADDITIONAL TAX until you know your rights!
If you or a debt settlement company negotiated a debt for less than the balance due and if that amount was more than $600, you most likely will receive a 1099-C.
The 1099-C looks like you will have to pay 100% of the settled or forgiven amount, but this is simply NOT TRUE!
However, a lot of tax preparers and even CPA's don't understand this law and how exemptions are calculated.
According to IRS Form 4681, there are several exemptions to including forgiven amounts back into taxable income. On page 4 of IRS Form 4681, there is an explanation of "INSOLVENCY".
Basically the rule states:
If at the time of the settlement or forgiveness you were INSOLVENT, then the amount of the forgiveness IS NOT INCLUDED as additional taxable income.
How do you determine if you were insolvent?
At the time of the settlement, you need to show that your liabilities were only equal to or greater than your assets.
You need to complete a basic budget showing all of your income, outgo, and assets:
- Equity in your home
- Net value of your automobile(s), boat, etc.
- Net value of jewelery, stocks, bonds, etc.
- Savings or investment accounts
- Net furniture value, coin collections, etc.
For most people who have negotiated a settlement of their credit card or cards, they usually do not have any real assets and therefore the amount forgiven is not included as additional taxable income.
Once again, don't be surprised if your tax preparer or accountant is not really up on this procedure! You might want to download IRS 4681 for them to review.
If you have already filed your taxes for the last two years and if you paid additional tax on the additional income added back into your adjusted gross income, you should file an AMENDED RETURN.
If you are still unsure of what or how to deal with a 1099-C, please let us help.
We have helped dozens of tax preparers and accountants deal with the 1099-C issue and would be glad to assist.