1099-c received after death

[DExt2021]

My father passed away in January 2020, and my mother filed a final joint tax return for 2020. She no longer has any income (other than social security) and is not required to file a tax return for 2021.

Before my father passed away, my parents placed most of their assets in a joint living trust. The only assets that were not placed in the trust were a business checking account (which was attached to a sole proprietorship that was owned in my father's name only) and 2 cars (both more than 20 years old). 

The sole proprietorship was a small auto repair shop that was closed soon after my father passed away. No probate or estate tax return was needed. My parents have only resided in California.

Wells Fargo sent a letter that they were going to file a 1099-C for forgiven business debt (about $51,000) in my father's name and social security number for the date of 12/31/2021. We have not received an official 1099-C form yet, only a statement. (We anticipate another 1099-C from Bank of America for other forgiven business debt, possibly in 2022; we are working with BofA to close the business checking account still. No funds have been distributed to my mother from the BofA business checking account yet.)

When I asked several accountants, one CPA said that we should file a 1041 for my father's estate along with a 982 for insolvency. Another CPA said that my mother may need to file another joint tax return because she is responsible for my father's cancelled debt since my parents resided in California, a community property state. However, the cancelled debt was issued after the final joint tax return was filed last year.

What should we do? I have reached out to a tax attorney but they are too busy to respond since it is tax season. We are getting anxious because the April 15 deadline is fast approaching.

I understand from other posts here that the 1041 and 982 forms seem to be the correct response to a deceased person's 1099-C. Is this something fairly simple that we can do using Turbo Tax?

We would greatly appreciate anyone's help!

[JillS56]

Yes.  the Form 1041 and Form 982 can be prepared in TurboTax.  Form 1041 can be prepared in TurboTax using the Business version.  Form 982 

(Reduction of Tax Attributes Due to Discharge of Indebtedness) reports the amount of cancelled debt to excluded from taxable income.  TurboTax will  automatically generate Form 982 if your canceled debt is for a qualified principal residence indebtedness, aka mortgage debt relief.

However, based on my research since your father passed away in January 2020 your mother cannot file a joint return for 2021.  Therefore, there is not a return to add the income unless there is an estate opened.   If there was no estate or probate opened or the estate was closed, then there is nothing you can add it to. If you want to be cautious you can put "deceased " on it and send to the IRS with a letter or you can address it later if they contact you over it.

NOTE:  If you are on the 1099-C as a joint recipient of the canceled debt, you need to include it on your return.

Form 1041

Form 982

[DExt2021]

Thank you so very much for replying!!

No probate or estate was opened because almost all of the assets passed through the trust to my mother. The only asset still unresolved is a business checking account with about $4000.

We still have not even received an official 1099-C form regarding the Wells Fargo debt. All we received was a statement/letter that they were going to create and file one with the IRS. Moreover, the letter was addressed only to my father and his social security number.

Thanks to your research, if we don't have to file anything, it would be a huge relief!

But, would the IRS really contact us about it later on? My concern is if we receive the official 1099-C after April 15 and it is still dated for 12/31/2021, would that get us in trouble? What if we never receive a 1099-C from Wells Fargo?

Thank you again!

[JillS56]

No, it is unlikely that they would come after you for it.   Since there is no return being filed under his social security number in 2021 and the 2020 tax return his date of death was reported.  Your father has no filing requirement for 2021 since he passed away in 2020.   There is nowhere to report the 1099-C.   

If you never receive a 1099-C from Wells Fargo, there is nothing to be concerned about.

My suggestion would be if you receive the 1099-C, put it with a copy of the death certificate, and if you receive any communication from the IRS concerning the 1099-C, then respond to the letter with a copy of the death certificate.   

[DExt2021]

Thank you very, very much, JillS56! My family and I cannot thank you enough for your help and advice. You gave us an answer when no other CPA or attorney would help us.  Thank you again for taking the time to respond during the busy tax season!

[DExt2021]

May I ask if being residents of California makes a difference in this situation? My parents have always been residents of CA and I was wondering if the community property rules would make things different.

[JillS56]

The fact that you are in a community property state does not make a difference.  Since your father passed away in 2020 and the 1099-C is issued in 2021 and your mother cannot file married filing joint in 2021, there is no where to report the debt.   

Since your father passed away in 2020, there are no tax obligations for him in 2021.   

Like I said before, keep it with your mother's tax papers for 2021 in case you get a letter from the IRS (I don't think you will).   Just respond to the letter with a copy of the death certificate showing that he passed away in 2020.   That should take care of it for you.   

NOTE:  This is the proper way to handle as long as your mother's name and social security number do not appear on the 1099-C.   If her name and social security number appear on the 1099-C, then she will have to report it on her taxes.   The 1099-C should have been issued and sent to you by January 31.  

[DExt2021]

Thank you very much! I will do as you advise. I had to ask specifically about the CA community property rule just to be sure. I think it's odd that Wells Fargo sent the statement two weeks ago instead of an official 1099-C. I guess I'll have to see if it comes later.  

Thank you again for all of your help!

[belindap]

This answers part of my question too.  My mom passed away in 2021, we did not file an estate because all of their property and automobiles were in both my parents names.  She did have credit card debt and we received two 1099C's this year.  Based on what I just read, my Dad doesn't have to claim these since he filed his last joint return in 2021.  However, I do have another issue.  He sold their marital home in 2022.  (We live in Alabama). Because he sold it within two years of her death, my understanding is that he can claim the full $500,000 tax exemption. But now that we have these 1099C's does change anything since he is claiming the full exemption?

[DaveF1006]

In claiming his capital gains exclusion for the sale of the house, the 1099C's have no relevance in this matter. He can still claim his exemption and he does not have to report the 1099C's.

{Edited 03/29/23} (05;15 PM PST} @belindap

[belindap]

Thank you, I appreciate your help.