Monday, January 19, 2015

Special Alert: 1099-C Taxe Solution (the possible way you can avoid paying taxes on your 1099-C, if you qualify!)


Lego Soldiers coming to take taxes from the poor! Stupiud IRS... All rights reserved "The tax inspector" by THE BRICK TIME Team
All rights reserved "The tax inspector" by THE BRICK TIME Team

*Disclosure: I'm not a tax consultant, I'm a normal person who is sharing his experience. Consult your own tax adviser or resources for your situation.

Warning!! Tax Nightmare Approaching... 

Surprise 1099-C

So a few years ago we were humming right along. Our business's hadn't made much of anything (less than $100.00 annually!) We have always filled taxes in late January or early February. Not much to report. Income and Interest paid on debts. This particular year, everything went through with the IRS, and we received our tax return.

Later that year, we received notice of an Audit, because we failed to file the 1099-C with our tax return.I asked myself... what is a 1099-C? Top FAQ's on 1099-C's HERE. The short answer is this:

  • Debt Incurred: You borrow money from a company. 
  • Debt Unpaid: You fail to pay that debt off, and it goes to collections. 
  • Time Elapse: Time Passes.
  • Time Elapse: MORE time passes. 
  • Report the Loss: Years later, they've tried to collect that debt from you with no success and they choose to tax a tax write off for themselves by "taking a loss" on that debt. They get to reduce their "income" by the amount of the debt you didn't pay. They report that loss on their income, and send you a form 1099-C. 
  • Report the Gain: in the eyes of Big Brother (IRS) if you were given $5,000 by your credit card company for your vacation to Hawaii, and you didn't pay it back, that was INCOME for you! So the same year that the company reports the LOSS, you are required to report the INCOME!
  • Taxes: this means that on your taxes, when reporting the income you made from W2 jobs, and interest and dividends from investments, and sales in your personal business... you also MUST include this loss as income for yourself as well.... 
  • UNLESS... you are insolvent.

 Insolvency

So insolvency is fancy way of saying that you owe more than you are worth, (most of the USA). This is a bad place to live, but a good place to be if you've received a 1099-C and do not have any savings built yet to pay the surprise tax bill!

You need to prove to the IRS that you owe more in debts than you are worth (you are insolvent).

From the IRS Website:

What if I am insolvent?

A taxpayer is insolvent when his or her total liabilities exceed his or her total assets. The forgiven debt may be excluded as income under the "insolvency" exclusion. Normally, a taxpayer is not required to include forgiven debts in income to the extent that the taxpayer is insolvent.
The forgiven debt may also qualify for exclusion if the debt was discharged in a Title 11 bankruptcy proceeding or if the debt is qualified farm indebtedness or qualified real property business indebtedness.
If you believe you qualify for any of these exceptions, see the instructions for Form 982. For more information, see highlights of the Mortgage Forgiveness Debt Relief Act.

File a Form 982


Form 982 Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment) 0713 07/17/2013


This form will allow you to inform that IRS that you are not going to include the 1099-C as part of your taxable income. It can be used in conjunction with a worksheet of your own design, specifying (proving) your negative net worth.

In layman's terms that means, you use a worksheet to prove you owe more than you are worth. I built an excel worksheet to include with my 982, linked here for you to use and adapt to your needs. (NOTE: I'm not a tax adviser, use this worksheet at your own risk/success, your mileage may vary).


Worksheet Here







Conclusion:

With these tools I was able to avoid paying extra taxes on this surprise audit. This was MY story, your story may vary, and the IRS changes their rules ALL the time. Do your own research and/or consult a tax adviser to be sure.


BONUS TIP: Check to see if you have a 1099-C BEFORE you file your taxes

In the Credit.Com article Top FAQ's on 1099-C's HERE, it says:
Call the IRS at 800-829-1040 and request a wage and income transcript for the tax year(s) in question. It should list any 1099-C that was filed under your Social Security number.
I also found, you can get your Internal Revenue Service (IRS) Wage and Income Transcript online,

I found no entries (even my W2 amounts) for the tax year that just passed (the one I would be filing a return for this year). Therefore, since most companies have until January 31st to complete their side of these returns. So, you may have to wait until some time in February before these forms start to show up on the IRS website.

This means that if you have any chance that there is an old debt out there that could be 1099-C'd, wait until mid to late February before filling your return. Trust me, from experience, it's easier to do it right the first time, than fix it after!

As always: #BeStillBeLed?


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And now I leave you with a question:

 

So... what are your thoughts about this? What did this make you think about? 

Hit me up on Twitter @DarrellWolfe or on Google +DarrellWolfe

By Darrell Wolfe

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