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Cancellation of Debt (COD)

TaxWise:  When taxpayers bring in a Form 1099-C and/or a From 1099-A, "COD certified" counselors should:
 
START:  Open Pub 4012 pages D-29 through D-32 
Follow the steps laid out in the Volunteer manual.
  • For credit card debt: follow interview questions on page D-31.

Insolvency is relevant to credit card debt 
 
When a taxpayer presents an AARP Tax-Aide volunteer with a Form 1099-C for canceled nonbusiness credit card debt there are at least two possibilities:
  • If the taxpayer was solvent at the time the debt was canceled then following the step in the PUB 4012 page D-31 may result in the cancel debt reported as ordinary income on Form 1040, line 21.
  • However, if the taxpayer was insolvent at the time the debt was canceled, the Form 1099-C income may be excluded on the Form 982, but this is out of scope for AARP Tax-Aide volunteers

Note:  The insolvency worksheet
 on Pub 4102, page D-32 (originally from Pub 4681, page 6) is provided by the IRS to the taxpayers to help them get a sense of what insolvency means. AARP Tax-Aide volunteers cannot make that assessment for them. If there is any doubt about whether the taxpayer was insolvent or not at the time the debt was canceled, then explain to the taxpayer that the 1099-C income may be excluded if he/she was insolvent and though this is out of scope for AARP Tax-Aide volunteers  (The IRS says so, it is not negotiable). That is the point at which the referral to a professional would be made unless including that income still leaves the taxpayer with no tax liability.


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Wayne Culp,
Sep 19, 2014, 2:55 PM
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