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4beverly-jump
New Member

Can a charge off be included as a tax liability on the Statement of Insolvency?

 
6 Replies
DanO
New Member

Can a charge off be included as a tax liability on the Statement of Insolvency?

Not quite, a charge off needs to be settled to become a canceled debt at which point it could become a tax liability.

Until it is settled the creditor can still continue collecting or attempting to collect even though the debt has been charged off of their books.

rnelson9
Level 2

Can a charge off be included as a tax liability on the Statement of Insolvency?

Hello,

I believe the question was more "Can I include a debt that is charged off (before it becomes canceled via settlement or otherwise) in the worksheet for insolvency (as a pre-tax liability).

 

e.g.1) You owe $10K; 2) you default on the loan; 3) the loan gets charged off and sent to collections; 4) Collections reaches out to you and offers to settle for $3K; 5) the 7K is canceled debt sent via a 1099C.

 

When filling out the Statement of Insolvency, can you list that 10K (a charged off debt, prior to being canceled) as a liability? In other words, does a debt that is not in good standing/sent to collections still qualify as a liability (wherein it can be subtracted from your assets).

 

Yes, you will need to include the 7K as income, which creates a potential TAX liability, unless you can prove insolvency. But when calculating insolvency to avoid said tax liability, are you allowed to include a debt that has been charged off as as pre-tax liability?

ColeenD3
Expert Alumni

Can a charge off be included as a tax liability on the Statement of Insolvency?

This reference points to a yes, without specifically addressing the issue. Charge Off

 

The IRS doesn't list this as one of the liabilities allowed on the Insolvency Worksheet, but there is a line to include other liabilites.

 

 Liabilities include:

• The entire amount of recourse debt,

• The amount of nonrecourse debt that isn't in excess of the FMV of the property that is security for the debt, and

• The amount of nonrecourse debt in excess of the FMV of the property subject to the nonrecourse debt, to the extent nonrecourse debt in excess of the FMV of the property subject to the debt is forgiven. You can use the Insolvency Worksheet, to help calculate the extent that you were insolvent immediately before the cancellation.

 

Insolvency

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rnelson9
Level 2

Can a charge off be included as a tax liability on the Statement of Insolvency?

Thanks for the response:

on form 982 - let's say you have 10K for Part I line 2 (amount of debt to exclude); then you put 10K Part II line 10a. How does the 10a amount impact your return, and what are you communicating to the IRS?

ColeenD3
Expert Alumni

Can a charge off be included as a tax liability on the Statement of Insolvency?

Part 1 Line 2 is asking how much you want to exclude.

Part 2 Line 10 is telling the IRS what you intend to give up in order to have them let you exclude the gain. You are verifying that you will reduce the basis in property that you own. At the time of sale, this will give you a larger gain.

 

You are basically postponing the income. However, while the debt cancellation would be ordinary income, there is a chance that the property you sell later on would produce a capital gain.

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rnelson9
Level 2

Can a charge off be included as a tax liability on the Statement of Insolvency?

Thanks again. Thats the most plain language explanation I’ve seen, although the term “basis" remains confusing.

1) Are personal loans from friends are family permissable to be listed as “Other” Liabilities on the worksheet? Such as borrowing money to settle the loan that gets canceled.

2) If your liabilities still exceed Assets immediately after cancelation, how do you address Part II 10a. Information across the web is inconclusive:

Some say put zero; others say leave it blank (which others then say triggers an automatic audit).

The IRS publication only gives examples of someone whose assets exceeds their liabilities post cancellation. 

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