What do I do if I get a 1099-C from a creditor for “forgiveness of debt tax”?

Don’t worry if you get a 1099-c from a creditor.  Study up on the issue and then consult a tax counselor for more advice.  Most tax advisors know all about 1099-c and its tax consequences.

Any debt forgiveness can result in taxable income in the eyes of the IRS.  The IRS considers forgiven debt to be income to you that is taxable.  This is true even though it is “phantom income” that you will never see.

Forgiveness of debt income can be on a settled credit card but more often it is concerning a mortgaged home that was foreclosed on or short sold.  Sometimes it is called “cancellation of debt income” or COD.  This can result in tremendous taxes owed by you to the IRS.

The good news is that if you short sold your home or had it foreclosed on you will be allowed to exclude up to $2 million in debt forgiveness with the Mortgage Forgiveness Debt Relief Act of 2007.  This law allows exclusion of this excluded debt from taxable income through 2012 unless Congress acts to extend it.  This act was passed during the home foreclosure crisis to give relief for homeowners who have had to abandon their homes.

The debt you incurred (and which was forgiven by the bank) must be to buy, build, or substantially improve your principal residence.  So business property, second homes, investment property, rental are all not covered by the Mortgage Forgiveness Act.

There are other ways to get out of this potential COD income though.  The most notable is bankruptcy.  If you file for bankruptcy then insolvency is presumed and you just file the IRS form 982.  Your accountant or tax preparer can help you with this.  This form has boxes you check and if you filed bankruptcy or were insolvent when the debt forgiveness or cancellation occurred then you check the box and file the form with your taxes.

So ask your accountant or tax advisor about form 982 if you received a 1099-c or if you are worried about the tax implications of a short sale or foreclosure on your home.  Remember that there is a law out there that helps you.  If you get one after 2012 and Congress lets the law expire then remember that there is bankruptcy or insolvency that will exclude the amounts of debt forgiven from your income and you therefore won’t owe any tax on it.

I am a San Diego bankruptcy attorney.  For further questions please visit my websites at www.farquharlaw.com or www.freshstartsandiego.com.  Or call my office for a free consultation or for any other advice about bankruptcy or debt at (619) 702-5015.  Call now for free credit report and analysis!   For a free e-book on “13 things to do to prepare for your bankruptcy filing” please e-mail me at farquharesq@yahoo.com.

Can I get rid of my tax debt in bankruptcy?

The answer is, it depends.  It depends upon what kind of taxes you are attempting to discharge in bankruptcy but if you mean income taxes then yes you can discharge them in bankruptcy.  Income tax dischargeability in bankruptcy is determined to just a few rules.

3 year rule

Taxes are dichargeable 3 years after they were due if there were no extensions..  If the taxes were due for the 2008 tax year in April of 2009 they would be dischargeable 3 years later after April 15th of 2012.  If you received an extension until October 2008 then they would be dischargeable in October 2012.

2 year rule

Taxes are dischargeable two years after the return was actually filed.  So 2008 taxes filed in April of 2009 would be dischargeable in April of 2011.

240 day rule

If you had income taxes assessed by the IRS the 240 day rule applies.  These taxes are dischargeable 240 days or 8 months after they were first assessed by the IRS.  Assessments often come after an audit of your taxes or if the IRS denies one of your deductions and then assesses you a greater tax.  If you wait until 8 months after these taxes are first assessed then they are also dischargeable in bankruptcy.

Other taxes

Most people have state or federal types of taxe issues but there are other cases.  If you owe sales taxes,  payroll taxes or withholding tax for employees for instance then those taxes are not dischargeable.  The IRS (or California State Franchise Board in California) consider these non-dischargeable because they were supposed to be withheld by the employer.  Many businesses rn into this kind of tax and it cannot be discharged in bankruptcy unfortunately.

Tax Fraud

If your tax return was made fraudulently or made to willfully evade taxes then those taxes would be deemed non-dischargeable in bankruptcy according to section 523 of the bankruptcy code.  This code section covers all of the exceptions to discharge.

Tax liens

If a tax lien was filed against you for failure to pay the tax then that lien does not get wiped out in the bankruptcy.  It remains after the bankruptcy.  So for example if the IRS put a tax lien on your house then it would not be extinguished by your chapter 7 bankruptcy.

You also need to be sure also that what you owe to the government is a tax.  If it is considered a “fine, fee, or penalty or forfeiture payable to and for the benefit of a governmental unit” then it is not dischargeable.  This is from section 523(a)(6) and this section is referring to things  like traffic tickets, parking tickets, court imposed penalties and fees.  Just make sure your tax is a tax and not one of these fines or penalties.

So most of your income taxes are dischargeable if they are old enough.  Have your attorney look at them careful to make sure they are.  You can always wait to file until they age if need be.

I am a San Diego bankruptcy attorney.  For further questions please visit my websites at www.farquharlaw.com or www.freshstartsandiego.com.  Or call my office for a free consultation or for any other advice about bankruptcy or debt at (619) 702-5015.  Call now for free credit report and analysis!  For a free e-book on “13 things to do to prepare for your bankruptcy filing” please e-mail me at farquharesq@yahoo.com.