Chosen Answer
exirsman:  You may not have any taxable income from the 1099C, but you must account for it on your return. The issue is whether or not you were solvent at the time of the debt cancellation. You only owe tax on the forgiven debt to the extent you were solvent. For instance, if the forgiven debt was $10,000 but you are only worth $5,000; you would only be liable for income tax on that amount. A home foreclosure is complicated and you may have other legal arguements besides insolvency. There are five situations where a cancelled debt does not have to be reported as income. Bankruptcy ? the debt was already discharged through a bankruptcy proceeding. Insolvency ? your total debts exceed your total assets at the time your debt was settled or deemed non-collectable. Indebtedness is due to a qualified farm expense. Indebtedness is due to certain real property business losses. Discharge of your debt was treated as a gift (You owed Mom $10K and she said "Don't worry honey, consider it a gift"). If you are insolvent you need to explain this to the IRS on your tax return. You can fill out IRS Form 982: Reduction of Tax Attributes Due to Discharge of Indebtedness or attach a detailed letter to your tax return explaining the calculation of your total debts and assets. Failure to address the 1099C will result in a tax assessment by the IRS for any amount over $600 plus penalty and interest. This will likely occur 12-18 months after you file when IRS matches up the info reported to them with what is on your tax return. The Form 982 is linked below. I recommend you meet with a CPA or Enrolled Agent on this matter.
2007-03-14 09:51:57