As
we approach the end of the year, it becomes a common occurrence for
the IRS to send our office a flurry of forms known as 1099c. These
are intended for people who have had debt forgiven during the
preceding year.
Oftentimes,
these forms can be intimidating as is nearly any communication
received from the IRS. In fact, as strange as it may seem, collection
agencies may use the threat of debt cancellation as a collection
tactic; telling you that if you don’t pay them they will cancel the
debt and then you will have to deal with the IRS. This is scary! The idea behind form (1099c) is that you would normally be
responsible for paying taxes on the canceled debt amount which could
possibly be significant.
Here
is where we can all pause and take a deep breath. Six years ago,
Congress passed the
Mortgage Forgiveness Debt Relief Act of 2007,
which also covers debt cancellation for
persons who are considered to be insolvent. This is great news for
our HELPS clients and more generally people on a limited income.
For amounts forgiven prior to January 1, 2014, the law states that as
long as a person is insolvent (their total debts are more than their
total assets); they may submit form 982 with their tax return which
will allow this money to be exempt from being taxed.
What
happens if you do not normally file a tax return? You can simply send
form 982 to the IRS along with a very simple form that lists your
debts and your assets. Be aware that if the amount to be forgiven is
significant, the IRS may request that you submit a simple tax return
for that year.
