Student Loan Cancellation of Debt (1099-C) due to permanent disability under IRC Section 108 (f) 5 (iii)

[Bill2220]

How would I enter this in Lacerte?  I am assuming that you would show the 1099-C as income in Lacerte, and then "ZERO the amount out" directly below the Lacerte entry with the following description: "non-taxable pursuant to IRC Section 108 (f) 5 (iii)."  Any help would greatly be appreciated!

[George4Tacks · Accepted solution]

That sounds like a sound way to do this. 

Back in the olden days, IRS had problems with a net zero for other income, but e-file gets all the information to them in a more logical way.

[Bill2220]

Agreed.  I have also used this method for incorrectly issued 1099's for business clients who received 1099's with their personal ss#, rather than their efin.  I zeroed it out as a "nominee distribution" to the corp.  Thanks!

[BobKamman]

I still think the Internal Revenue Manual says that CP-2000 clerks can't look at the return itself.  Maybe someone can find out from the sister-in-law of the guy in the next barber chair, who used to work there.  If the insolvency exception works on Form 982, I would use that instead.  

[Bill2220]

Form 982 is not too much fun to complete, citing a specific code section is simpler.  Also 982 is only applicable if you are actually insolvent.

[BobKamman]

Insolvency requires checking one (1) {один} box.  Maybe not fun, but quick.  

All I know is what I read in the Internal Revenue Manual:

4.19.3.8.20.1 (10-07-2019)

Cancellation of Debt (DBTCN) - Analysis

If the TP reports the full amount of the IR and then zeroes it out, request the TP either get a corrected statement from the payer or submit a completed Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (And Section 1082 Basis Adjustment).

[Bill2220]

Thanks for your response.  The only box that I think is applicable on form 982 is "box 1b," which requires the completion of the insolvency worksheet.  The client is not insolvent, and is permanently disabled.  The discharge of student loan debt is non-taxable pursuant to 108(f)5(iii).  I have no idea where to enter this 1099-C other than by Zeroing it out on page one. What are your thoughts? Thanks again!

[BobKamman]

The insolvency worksheet does not have to be filed with the return.  If you have already determined the client is not insolvent, you already have done one (as you should have) -- probably not on the IRS form, but in notes that can be used later if needed.

The question you are asking is really, "Does every single scrap of paper that gets sent to IRS, have to be shown on a return somewhere?"  Many practitioners think so, at least until confronted with a 1099-LTC.  The corollary is, "does every 1099 get matched to a return by IRS and create a CP-2000 if not found?"  It's obvious that IRS has certain criteria:  Certain forms get examined more than others, certain amounts are below the criteria for making it an issue.  Also, collectibility is an issue in choosing returns for examination.

Until IRS comes up with a better plan, use Form 8275 to immunize yourself against IRS inquiries.  And file a paper return so an examiner will actually see it.  

[Bill2220]

Thank you for your excellent advice.  I guess its a "piece of mind issue," and filing a paper return with Form 8275 is a great idea and I agree 100%.  Thanks again for your time. I really appreciate it!