When a financial institute or debt collector cancels some or all of the debt you owe, you will be issued a 1099-C. This will reflect the amount of money that was cancelled or settled. You can also be issued a 1099-C if there was a collateral repossession that did not cover the entire debt that you owed. In this case, you would be issued a 1099-C for the remaining balance. A creditor or debt collector may also issue you a 1099-C if they feel that they have exhausted all attempts to redeem the money and that it cannot be redeemed. Unfortunately, the IRS will consider any money reported as a 1099-C, as a form of taxable income unless you can prove that it was insolvency during the time that it was cancelled.
First, you are going to need to gather all of your 1099-C’s and add up the entire cost of them all. All creditors are required to report settlements or debt cancellations to the IRS if they are higher than $600. Then, you need to make a list of all of your assets. An asset is considered a valuable item that you can sell for cash. Assets can include your car, your home, jewelry, or other valuables. You should determine a fair market value for these items.
You should also make a list of all of your liabilities. Liabilities include any additional debt that you might owe. Finally, you need to create a financial statement that compares your liabilities to your assets. Ideally, you want the table you create to demonstrate the fact that your liabilities in dollars exceed the fair market value of all of your assets. This table must be created at the time you receive the debt cancellation or the settlement. The only way that the IRS is going to deem you insolvent is if you complete the table as soon as you receive the 1099-C. In the event that you are insolvent, you are not required to file your 1099-C as an income. However, it is suggested that you file for insolvency to ensure there is not a problem. This is because all creditors are required to send copies of your 1099-C’s to the IRS.
Once you create this table, you can file an IRS Form 982 alongside your tax return. It is suggested that you also send a detailed letter to the IRS explaining your financial statement and clarifying that your insolvency.