I recently settled on a home modification in 8 / 2012 . A 1099 - c for the amount of approx ~ $ 43K was issued . When plugged in to my tax returns for 2012 , I will be held responsible for about ~ $ 12 in tax liability . The cancellation of debt was issued for a combined 1st mortgage modification & a 2nd mortgage pay - off for lesser amount . I have initiated a dispute of the amount , because they don't correlate with my calculations . I do expect a poor outcome , and will succumb to this huge IRS bill . I may attempt to fill out form 982 & claim insolvency . But my main questions is : in the current year of 2013 , I will be incurring a short sale & suspect that BOA will submit a 10-k of approx ~ $ 10-k , which constitutes a tax liability of $ 60S . How do I prepare for that hit or avoid paying ?
Generally speaking, for your primary residence in 2012 or 2103, you don't have to pay taxes on this anyway.
The bank is required to issue the 1099, but you respond, as you noted, with a 982.
It would be a good idea to have a consult with a CPA or tax attorney (no, not a bookkeeper or tax service!) for good measure, given the amounts involved.
Also, if you do end up stuck with tax liability, there may be advantage in filing Chapter 13 prior to the tax assessment date, due to the way Chapter 13 handles tax penalties. This wouldn't be enough reason on its own to file a 13, but if you're already teetering on the edge, or if it's in your future, it's something to keep in mind.
I agree with the previous answers. Because of the amounts involved it is certainly in your best interests to pay for at least a consultation with either a tax attorney or a CPA, and either have them prepare your return or follow the recommendation. If you file the return yourself, you are more likely to face an audit.
The 1099-C is merely a reporting document, getting a 1099-C does not mean you will owe tax. A 1099-C merely reports to the IRS that a potentially taxable event occurred (forgiveness of debt).
You either qualify for an exemption to paying the tax, or your don't. If you don't, you will owe tax. All you can do is see if you qualify for one of the exceptions provided on Form 982.