Author Topic: can a legal 1099cbe issued without a judgement or settlement agreement?  (Read 18422 times)

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computerguy1

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Everything has been quiet as a church mouse, until I received a letter from the IRS stating that Chase Manhattan forgave an alleged debt back on 12/31/2005 and now I supposedly owe income tax and penalties on my 2005 Tax return. I never received squat from Chase Manhattan before which includes, letters, 1099c or anything. The original alleged debt was with Bank One of Delaware NA a/k/b First USA Bank NA.  How would Chase Manhattan have anything to do with this alleged debt? I originally sent a Validation request to Mann Bracken concerning the alleged debt from First USA Bank NA back in early 2003.  They did not respond nor did they purue their threat of Arbitration. The last payment on the original debt to First USA Bank Na was 11/15/2001.  On the IRS paperwork is listed Chase Manhattan in Texas and it listed a date of sale of 12/31/2005.  What do you learned ones think of all this and what if anything can I do to squeek by on this? :(

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Re: Is There a SOL on 1099C Forgiveness of Debt?
« Reply #1 on: April 17, 2007 06:32:54 PM »
That is the anamoly of the law:  A 1099C can be required to be issued on a debt under IRS rules yet the debt reamins salable!  In other words, cancellation of debt in the view of the IRS is really a form of tax writeoff for the credit issuer which is forced after a period of time (three years without significant collection activity), and is not meant to be a benefit to the debtor.  A way of getting the consumer at both ends.  It's also not required that you get the 1099C, only that the IRS does.

You may have a problem, a real one:  The IRS will want their money and can get it.  You might want to consult a tax lawyer or an EA as to whether some relief is available, at least as far as penalties and interest owed to the IRS are concerned since you were never informed that the debt had been cancelled by Chase (who, if I am not mistaken, bought out Bank One), and therefore you had no way of knowing that you owed the IRS anything.  You will still need to pay taxes on the cancelled debt itself; you won't get out of that, I am certain.

It's also something that we all have to watch for in that third year without significant collection activity--the dreaded 1099C and its effect on ordinary income for the tax year of issuance.  How to be sure we know about it if one is indeed issued?  I know of no way that notice can be forced from the issuing business; the IRS sure won't say anything until they actually try to collect on the taxes we did not know we owed!! >:(
« Last Edit: April 17, 2007 06:34:42 PM by Rottweiler »
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bulldog

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Re: Is There a SOL on 1099C Forgiveness of Debt?
« Reply #2 on: April 17, 2007 08:34:05 PM »
Rotti,

You're right about OP getting in contact with an EA or accountant.  They can go through the regulations applicable to the time involved and may be able to negotiate an "Offer in Compromise" (basically a settlement with the IRS) which could mean a payment arrangement for the original amount and/or lower interest. 

IRS is not always merciless.  They can occasionally be quite helpful, especially since they are people, too. 

Kitten

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Re: Is There a SOL on 1099C Forgiveness of Debt?
« Reply #3 on: April 17, 2007 11:02:14 PM »
It's not time to be talking OIC yet.
Was there an honest dispute as to the validity or amount of the debt at the time of discharge?
Was the debtor insolvent at the time of discharge?
Did the debt arise from farming operations? (I'm not kidding)

Flyingifr

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Re: Is There a SOL on 1099C Forgiveness of Debt?
« Reply #4 on: April 17, 2007 11:37:32 PM »
Actually (and speaking as an Enrolled Agent) I wouldn't be panicking yet either. There is a significant loophole in the taxability of discharged debt that many people facing this issue overlook.

I direct you to Internal Revenue Code Section 108(a)(1)(B) and 108(a)(3) which allows a taxpayer to exclude from income "indebtedness that occurs while the taxpayer is insolvent (but not involved in bankruptcy proceedings) up to the amount by which the taxpayer is insolvent."

Translated into common language and everyday usage, as long as, after the debt cancellation, you still owe more than you own then you can exclude the cancelled debt from your income and tell the IRS to stuff their 1099C. In the absence of anything to the contrary, IRS will always assume the taxpayer solvent and the 1099C is fully taxable.

How do you show you are insolvent? First, let's take a look at the concept of insolvency. The IRS' own Procedure Manual, the Internal Revenue Manual, defines Insolvency thus:

Quote
Generally understood to mean an inability to pay debts as they become due. However, the Bankruptcy Code refers to an insolvent entity as one whose debts are greater than the fair market value of its assets (11 USC § 101(32)). A debtor need not be insolvent to file bankruptcy.
IRM 5.9.1-1

So... for tax purposes, if you cannot pay your debts, then discharging a debt is some sort of assistance (and hence the concept of taxability - being relieved of the requirement to repay it makes what you recieved in the form of a loan de facto income). BUT.... if you still can't pay your remaining debt after the discharge, you are still insolvent. Think of it this way - you are on a ship in the middle of the ocean and the ship starts to sink - and you have no life boat, no life preserver and you can't swim. Does it matter how deep the ocean is as long as you cannot reach the bottom?

Congress, recognizing this dilemma, allows the exclusion of cancelled debt that allows no real relief from the debt burden. As long as, after the cancellation of the debt, you are still insolvent, you are still insolvent and have realized no constructive taxable income.

How does one take this benefit? Simple - when you file the return where the 1099C income is to be recognized, you add the 1099C into the Other Income line of teh 1040 and then prepare  aBalance Sheet as of the date of the debt cancellation listing what you own (at fair market value) and what you owe (at full value). As long as you owe more than you own, you are still insolvent. You attach the balance sheet to the tax return and take the 1099C out of your income as an Adjustment to Income. If the cancellation
 makes you solvent, you recognize the cancellation income only up to the amount that you became solvent by. If the 1099C coms to your battention after you have filed, you can amend the tax return or (if the IRS is sending you a CP2000 document matching letter) reply to the letter with the balance sheet and the statement that you are excepting the 1099C under IRC 108(a)(1)(B) and 108(a)(3). Here are some examples:

1099C in the amount of $10,000 in all cases.

Case 1: Balance sheet shows assets after debt cancellation of $50,000 and debts of $65,000. The taxpayer is still insolvent, and none of the cancelled debt is income.

Case 2: Balance sheet shows assets after debt cancellation of $50,000 and debts of $45,000. Since the taxpayer is solvent by only $5,000 after the cancellation of debt, that is the amount of debt cancellation income the taxpayer recognizes.

Case 3: Balance sheet shows assets after debt cancellation of $50,000 and debts of $5,000. Since the amount of debt cancellation is less than the amount by which the taxpayer is solvent, the taxpayer recognizes the full $10,000.

BTW, Rotty - your Accounting theory is a bit off. The tax benefit to the lender is realized at the charge off of the debt, not at the issuance of the 1099C.
BTW-the Flyingifr Method does work. (quoted from Hannah on Infinite Credit, September 19, 2006)

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Brent

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Re: Is There a SOL on 1099C Forgiveness of Debt?
« Reply #5 on: April 18, 2007 07:52:59 AM »
In regards to the 3 years without significant collection activity. How is this defined? A phone call everyday or a dunning notice once a year?

Concerning insolvency. Can you use old out-of-stat debt?

E. Normis Debtor

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Re: Is There a SOL on 1099C Forgiveness of Debt?
« Reply #6 on: April 18, 2007 11:16:38 AM »

As long as, after the cancellation of the debt, you are still insolvent, you are still insolvent and have realized no constructive taxable income.
I disagree. Insolvency is to be calculated based on assets v. liabilities immediately preceeding the debt cancellation.  Therefore, the debt that was cancelled is included as a liability for purposes of calculating insolvency.

Brent, as long as you can show you would be called upon to pay the obligation, whether it is OOS is irrelevant.  The exception is if they sue you and you successfully use SOL as a defense, the cancellation automatically occurs on the day after their time to appeal expires.
« Last Edit: April 18, 2007 11:31:08 AM by E. Normis Debtor »
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Flyingifr

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Re: Is There a SOL on 1099C Forgiveness of Debt?
« Reply #7 on: April 18, 2007 12:16:57 PM »
I disagree. Insolvency is to be calculated based on assets v. liabilities immediately preceeding the debt cancellation.  Therefore, the debt that was cancelled is included as a liability for purposes of calculating insolvency.

Right you are, Norm. On the last day of tax season I had a brain cramp.

Quote
Brent, as long as you can show you would be called upon to pay the obligation, whether it is OOS is irrelevant.  The exception is if they sue you and you successfully use SOL as a defense, the cancellation automatically occurs on the day after their time to appeal expires.

To amplify on this - the issue of being OOS is between you and the creditor. The issue of the taxability of the 1099C is between you and the IRS. The two have nothing to do with each other other than one was created by the other.
BTW-the Flyingifr Method does work. (quoted from Hannah on Infinite Credit, September 19, 2006)

I think of a telephone as a Debt Collector's crowbar. With such a device it is possible to pry one's mouth open wide enough to allow the insertion of a foot or two.

Morality of Debt? No one ever went to the Nether Regions for not paying a debt.

Founder of the Credit Terrorist Training Camp (Debtorboards)

flacorps

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Re: Is There a SOL on 1099C Forgiveness of Debt?
« Reply #8 on: April 30, 2007 12:33:29 PM »
IIRC, the creditors (and JDBs in particular) were greatly concerned over the requirement that they issue forms 1099c, claiming they could be violating the FDCPA, or could lose the right to sue on the debts even though the IRS claims there's no impact on state-law claims from the issuance of a 1099c. They sued the IRS a couple of years ago. Does anybody know how that turned out?
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flacorps

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Re: Is There a SOL on 1099C Forgiveness of Debt?
« Reply #9 on: April 30, 2007 03:44:08 PM »
OK, the debt buyers lost, the requirement to issue the forms 1099c stood (but the debt-buyers are supposed to send a sort of mini-miranda with the 1099c--I would imagine that failure to do it would provide the debtor ammunitition to argue extinguishment).

http://www.ryancareycpa.com/Papers/Tickmarks%20Fall%202006%20Article%20-%20Carey.pdf

In Connecticut it looks like the 1099-C is considered to extinguish the debt, and a Kansas BK court thought the same, but that case contains mistaken reasoning.

IMHO, the ideal solution to the quandary would be for the business issuing the 1099c to be required to actually forgive the debt to the extent they receive a tax benefit (in other words, the amount of their deduction or loss carryforward on account of the recognition of the deemed worthlessness of the debt in the tax year). For instance, if the issuer's marginal rate were 30% for the sake of argument, and they wrote off a $50k debt, they would pay $15k less tax, or have a $50k tax loss carryforward worth $15k. The debtor should be relieved by the creditor of $15k in debt, with $35k remaining on the books. Remember, the debtor is required to show $50k of income because of the 1099c. The debtor may or may not pay $15k in tax on that ... it could be more, it could be less, or even zero.

The recognition of the income would "punish" the solvent debtor who simply didn't pay his debts, but nonrecognition on account of insolvency would provide a boon to destitute debtors.

Meanwhile, I have also noticed that some businesses apparently issue forms 1099c on accounts they also sold during the tax year in question. If the sale occurs after the 1099c is issued, I would say all the business needs to do is inform the buyer of the tax attributes that go along with the debt. But if the 1099c comes after the sale, I think that would be improper. You can't forgive a debt you've already sold. Note that the debt buyer should be in no position to issue a 1099c either ... they paid very little, and are out very little--and they shouldn't even be able to recognize that until 36 months down the line. Nonetheless from a perspective of just desserts, a 1099c should be issued by somebody. So regardless of how you look at it, the current system is seriously flawed.

Edited to give mention to the 1099c mini-miranda.
« Last Edit: April 30, 2007 04:07:05 PM by flacorps »
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computerguy1

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Re: Is There a SOL on 1099C Forgiveness of Debt?
« Reply #10 on: May 02, 2007 05:57:00 PM »
Thanks for all the Input and reasoning behind your replies regarding my IRS suprise.  I went ahead and paid the crooks the extra pecunia.  The most disturbing and irritating thing about getting my letter, is I had to pay penalties with interest, when I didn't know anything about this for my 2005 tax year.  I would had more thought go into my return for 2005 and would have claimed the 1099C on my return.  Tax Software is good stuff and pays off!

InAHole55

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Re: Is There a SOL on 1099C Forgiveness of Debt?
« Reply #11 on: December 16, 2007 07:36:45 PM »
On my 05' taxes I recieved a 1099-R from my 401k for $11K, which was the discharge of a 401k loan that I defaulted on.  the form stated it was an early withdrawl, but I was not solvent enough to repay the debt at the time.  I owe quite a bit on my taxes for this and I am curious if I can use the same approach to a discharged debt??

Flyingifr

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Re: Is There a SOL on 1099C Forgiveness of Debt?
« Reply #12 on: December 17, 2007 12:21:32 AM »
On my 05' taxes I recieved a 1099-R from my 401k for $11K, which was the discharge of a 401k loan that I defaulted on.  the form stated it was an early withdrawl, but I was not solvent enough to repay the debt at the time.  I owe quite a bit on my taxes for this and I am curious if I can use the same approach to a discharged debt??

No. You received the money in the form of a 401K loan that you defaulted on. There is no debt forgiveness on this, since there was no debt to be forgiven (remember, they still had the 401K money).
BTW-the Flyingifr Method does work. (quoted from Hannah on Infinite Credit, September 19, 2006)

I think of a telephone as a Debt Collector's crowbar. With such a device it is possible to pry one's mouth open wide enough to allow the insertion of a foot or two.

Morality of Debt? No one ever went to the Nether Regions for not paying a debt.

Founder of the Credit Terrorist Training Camp (Debtorboards)

flacorps

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Re: Is There a SOL on 1099C Forgiveness of Debt?
« Reply #13 on: December 21, 2007 02:01:07 PM »
I read in the paper the other day that congress passed a three-year moratorium on cancellation of indebtedness income for taxpayers who renegotiate the balances on their home loans. This is a key tax benefit. I'm not sure if it will come in the form of not receiving forms 1099c, or if the taxpayer will need to file an additional form or schedule to take advantage of the moratorium ... most likely the latter since it's the more confusing option for the taxpayers.  :lildevil:
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Shorty

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Re: Is There a SOL on 1099C Forgiveness of Debt?
« Reply #14 on: December 21, 2007 08:39:46 PM »
Oh boy, this language is way too heavy for me, but I hope I can ask this question without confusing you and hopefully you can answer me in terms I can understand.

When my BK is discharged in January, will I have to pay taxes on all the debts that are discharged!  I don't understand this and I hope one of you can answer me.  Thanks again.