I received a 1099C from a creditor whom I had a debt with that was included in a discharged bankruptcy for 2017. The 1099 shows that the creditor is reported the debt as a loss in 2018 to the IRS as it relates to my bankruptcy. My accountant believes that the amount of debt shown on that 1099 is to be reported as income thus raised my tax liability significantly. I believe that having been insolvent during my bankruptcy it would be Excluded from my taxable income. Are there any CPA out there that can help me file the correct forms needed to inform the IRS that my canceled that was part of a Chapter 7 bankruptcy?
You are right to get a new tax preparer. Just a simple google search would give him the correct answer.
Generally debts that are forgiven by the creditor are considered taxable income. However, there is an exception for debts discharged in the bankruptcy. If this debt was included in your bankruptcy and discharged as a result, the debt is not income. However, since the creditor has issued you a 1099 you should consider getting the creditor to amend it. The 1099 is reported to the IRS and when they match your return to the 1099 the return will be questioned if you did not report it.
In addition debts that are forgiven at a time when you are insolvent are also an exception. If this is the case your accountant will have to attach a schedule to your return to show that you were insolvent at the time of the debt forgiveness.
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If you were insolvent at the time of the cancellation of indebtedness, that should be noted on your 1040 and is not taxable income.
I hope this helps!
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What’s missing from the answers above is that you should use form 982 to show the IRS why you are excluding it.. There are several boxes to choose from, you would choose the box discharged in bankruptcy.
I would find a new prepare because this issue has been around for about eight years.
Now there is a slight modification in the instance where the debt being forgiven is a mortgage on either your home or rental property and it was lost in a foreclosure or short sale.
In that case the only part that is reported as I have stated above is the excess of the 1099 amount over the fair market value of the property. It is taxable unless there is an exclusion under section 108.
Then you take the fair market value of the property and subtract the adjusted tax basis of the property and you arrive at a positive or negative number. This amount is reported as the gain or loss on the sale or exchange of the subject property.
Hope this helps.
The above attorneys are correct. You should look into working with another tax professional to have your returns prepared.
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