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Anne
Anne, Master Tax Preparer
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Experience:  Enrolled Agent with 25 Years Experience specializing Individual and Small Businesses
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On our 2007 return turbo tax did not copy over any of the $45000.

Customer Question

On our 2007 return turbo tax did not copy over any of the $45000.00 in 401k withdrawals (line 16a), to 16b. But we did report the withholding, and because of the "excess withholding" we got a huge refund. We also signed up with a credit card debt reduction outfit, owed $25,000 to start, but by the time we actually started getting it paid off the amount with fees, penalties and interest was $50,000. We paid the Credit card companies approximately $18,000, and $15,000 to the debt reduction outfit. $20,000 of the $45,000 went to settle that debt. Now the IRS says we owe taxes on $2400 dollars that they look at as income, even though we got no paperwork from anyone that told us something may be taxable.
Submitted: 5 years ago.
Category: Tax
Expert:  Anne replied 5 years ago.
HICustomerbr />
Thank you for using justanswer. It sounds like the IRS has received a Form 1099-C Cancellation of Debt notice from the credit card company. When a debtor "forgives" a portion of debt that you owe them, they may file the 1099C form, making the amount they forgave taxable to you. Please see below for more in depth information:


Tax Topics - Topic 431 Canceled Debt – Is it Taxable or Not?


I hope this helps
Customer: replied 5 years ago.

I guess I did not fully state my question, in part one the IRS says I must pay taxes on the entire 45,000, 25% of that amount went to the IRS to pay the taxes and penalties.

On the other one, we never got any communications from any of our creditors about the amount of the settlement. In most of the cases, the amount "owed" at the close of the account was twice or more of the actual money borrowed. Say we had borrowed $5000 from Citi Bank, and we were paying the minimum, then I forgot and tried to charge something that exceeded my $5000 credit limit, BANG they hit me with a $150 over limit penalty and they double my minimum payment and kicked the interest charges up to almost 30%. That over the limit fee kept up until I finally realized I had to come up with enough money to get the total amount owed back down < $5000. This is one of the banks I do remember the amount on, we settled with them for $5500, but they claimed we owed them almost $13,000, but the most we had opened at any one time was $5000. Because the difference was $7500 we had to pay the debt company %25 of the “saved” $7500. I can see paying taxes on loan where someone forgave money that had actually added to your net worth, but not when the “money” was excessive interest and penalties, and they make no allowance for how much it cost a person to get the debt forgiven. Besides, I thought that when someone did something to increase your income they were supposed to tell you with a copy of a W2 or 1099.

Expert:  Anne replied 5 years ago.
If I'm reading your follow up correctly, you are not disputing that you owe the tax and the penalty on the $45000. The tax and penalty was originally withheld, but due to some problem with Turbo Tax, that money was returned to you in the form of a refund, and you must now file an Form 1040X (Rev. February 2009)Amended U.S. Individual Income Tax Return for tax year 2007 and pay the applicable taxes and penalties that were previously refunded to you.

You are correct that when someone does something to increase your income they must notify you. You should have received a 1099C for the amount of credit card debt that was considered forgiven. You may ask IRS for a transcript of your account by filing
Form 4506-T (Rev. January 2008)Request for Transcript of Tax Return.

There is no charge for this record, and you should, in most cases, receive the information in about 2 weeks. You will want to check boxes 6 a, b, & c. This will give you the definitive answer re: whether or not there was any forgiveness of debt reported to the IRS, how much, and who reported it. This is your starting point for any stance you may need to take re: what was reported.

I hope this helps.
Anne, Master Tax Preparer
Category: Tax
Satisfied Customers: 1922
Experience: Enrolled Agent with 25 Years Experience specializing Individual and Small Businesses
Anne and 7 other Tax Specialists are ready to help you
Customer: replied 5 years ago.
I accept your answer, but it sure isn't what i wanted to hear, the amount they claim we owe is about 12000 including the cancelled debt.
Expert:  Anne replied 5 years ago.
I wish I could have told you what you wanted to hear. Please come back if you have further questions as you continue thru this process. Justanswer allows you to ask as many follow up questions as you like at no further charge.

Best of luck to you.

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Anne
Anne
Master Tax Preparer
1903 Satisfied Customers
Enrolled Agent with 25 Years Experience specializing Individual and Small Businesses