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How do you prove insolvency with the IRS?

How do you prove insolvency with IRS?…… Im considering having a debt cancelled and need to be certain I will not have to pay taxes for something some deemed as no value(my home)

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3 Responses to "How do you prove insolvency with the IRS?"

  1. Cathi K says:
    Cou add all your assets and all your liabilities. Whatever is being cancelled will not count. If your liabilities are more than your assets that is how much can be waived. You must count the values on the day the debt is forgiven which is the day before the date on the 1099C. Form 982 on the IRS website has instructions and sample worksheets. You must include all assets even furniture, jewelry, tools, untouchable retirement accounts, etc. If you are losing the house then its value and its indebtedness will be gone by the date on the notice so it doesnt count.
  2. the tax lady says:
    Cathy’s a little bit off.

    Get IRS publication 4681.
    Do the insolvency worksheet on page 6. This includes every debt (INCLUDING the cancelled one) and the FMV of every asset just before the debt was cancelled.

    If your debts exceed your assets by, say $10,000 and the cancelled debt will be $4000, then you are insolvent.

    When you file, you include for 982, a copy of your worksheet and fill in the form. Many people filling out the form have to attach a second worksheet, showing the remaining debt after cancellation and the total of your adjust basis in your assets plus cash on 1/1/2012. If you still owe more than you appear to have, you may be done. If not, you adjust your assets down by the amount of the cancelled debt and if you ever sell the asset, you owe income tax on the difference. (See page 9 of the publication for an example.)

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