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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 28395
Experience:  Taxes, Immigration, Labor Relations
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I got chargeoffs for $120k and now the IRS is asking

Customer Question

I got chargeoffs for $120k and now the IRS is asking for me for $20k for taxes, even though I never made a profit. If the credit card company forgave me for the debt how is that a profit? I have no assets/money to pay for the tax.
Submitted: 1 year ago.
Category: Tax
Expert:  Lev replied 1 year ago.
Several issues....When the debt is forgiven and it becomes obvious that it will not be paid back - that amount is classified as COD - cancellation of debt (COD) income - and it is income recognized because loans are cancelled.In general - that is taxable income and reported on form 1040 line 21.HOWEVER under certain conditions - you might be able to exclude COD income from taxable income.
Customer: replied 1 year ago.
What are those circumstances? How can I make sure I don't pay that? Is there a form I file?
Expert:  Lev replied 1 year ago.
.You MIGHT qualify for the insolvency exclusion.When you prepare your Insolvency Worksheet - you need to determine if you were insolvent.The worksheet may be found on page 8 in this publication - http://www.irs.gov/pub/irs-pdf/p4681.pdfYou list all your assets and all liabilities - on the day before the loan was forgiven - so include that loan into the worksheet.This worksheet is not sent with your tax return - just keep it for your record.Do not send any supporting documents and do not send that Insolvency Worksheet - to the IRS - just keep for your record..That exclusion is claimed on form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness.and that form 982 should be included into her tax return.- check the box 1(b) and list excluded amount on line 2.Here is the form - www.irs.gov/pub/irs-pdf/f982.pdf
Expert:  Lev replied 1 year ago.
Same rules are for all types of debts - when we took a credit - the money were not included into our income because that was a loan and we were expected to pay it back.When the debt is forgiven and it becomes obvious that it will not be paid back - that amount is classified as COD - cancellation of debt (COD) income - and it is income recognized because loans are cancelled.In general, you must report any taxable amount of a canceled debt for which you are liable as ordinary income from the cancellation of debt, on Form 1040.Canceled debts that meet the requirements for any of the following exceptions or exclusions are not taxable..Debt Cancellations or Reductions that Qualify for EXCEPTION to Inclusion in Gross Income:1.Amounts specifically excluded from income by law such as gifts, bequests, devises or inheritances2.Cancellation of certain qualified student loans3.Canceled debt, that if it were paid by a cash basis taxpayer, would be deductible4.A qualified purchase price reduction given by a seller5.Any Pay-for-Performance Success Payments that reduce the principal balance of your home mortgage under the Home Affordable Modification Program.Canceled Debt that Qualifies for EXCLUSION from Gross Income:1.Debt canceled in a Title 11 bankruptcy case2.Debt canceled during insolvency3.Cancellation of qualified farm indebtedness4.Cancellation of qualified real property business indebtedness5.Cancellation of qualified principal residence indebtedness
Expert:  Lev replied 1 year ago.
So far - as you had NO assets - I suggest to verify if you qualify for insolvency exclusion.If yes - that woudl allow to avoid tax liability.
Expert:  Lev replied 1 year ago.
So far - as you had NO assets - I suggest to verify if you qualify for insolvency exclusion.
If yes - that woudl allow to avoid tax liability.
That exclusion is claimed on form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness.
and that form 982 should be included into her tax return.
- check the box 1(b) and list excluded amount on line 2.
Here is the form - www.irs.gov/pub/irs-pdf/f982.pdf
Let me know if you need any help with reporting.
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Customer: replied 1 year ago.
When I filed the insolvency they said we still have to pay, I think they are unqualified in their job and really have no idea what an insolvency worksheet is. How can I get ahold of someone who actually knows the process ? I went to their local office and they didn't even know any of these terms
Expert:  Lev replied 1 year ago.
First of all - you are not required to hire a tax preparer - and perfectly may file your own tax return.
When you find that the tax preparer doesn't have required expertise - you may choose a different preparer or a different service provider.
A tax return preparer is trusted with your most personal information. They know about your marriage, your income, your children and your social security numbers – the details of your financial life.
Most tax return preparers provide outstanding service. However, each year, some taxpayers are hurt financially because they choose the wrong tax return preparer.
Anyone can be a paid tax return preparer as long as they have an IRS Preparer Tax Identification Number (PTIN) and they sign and enter it on all returns they prepare. However, tax return preparers have differing levels of skills, education and expertise.
The following points will assist you when selecting a tax return preparer:
Be wary of tax return preparers who claim they can obtain larger refunds than others can.
Avoid tax return preparers who base their fees on a percentage of the refund or who offer to deposit all or part of your refund into their financial accounts
Ensure you use a preparer with a preparer tax identification number (PTIN). Paid tax return preparers must have a preparer tax identification number to prepare all or substantially all of a tax return.
Use a reputable tax professional who furnishes their PTIN, signs the tax return and provides you a copy of the return (as required).
Consider whether the individual or firm will be around for months or years after filing the return to answer questions about the preparation of the tax return.
Check the person's credentials. Only attorneys, CPAs and enrolled agents can represent taxpayers before the IRS in all matters, including audits, collection and appeals. Other tax return preparers may only represent taxpayers for audits of returns they actually prepared.
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