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Debt Consolidation Forums US tax system and impact on debt

When determining insolvency, what does the IRS consider assets?



Sub: When determining insolvency, what does the IRS consider assets?
Thu, 30/06/2011 13:21

Just trying to clarify before I commit to attempting debt settlement.

When determining insolvency, what does the IRS consider assets and liabilities?

I am assuming liabilities are minimum payments and monthly expenses?



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Sub: #1 What is an Asset? That's the important question.Thu, 06/30/2011 - 13:21



A prior member asked:

"For insolvency what is the IRS definition of Interest in 401K and Pensions. This answer determines if I am insolvent. I used 401K loans to settle with credit card companies, so no loans are available. It should not include the total shown, since it includes deferred taxes. If it were available to take out, it would be subject to taxes and penalties.
Also - can legal fees paid to settle the debt be deducted from the COD?"

You're not going to like the answer, I suspect. While your retirement accounts such as an IRA, 401(k), 403(b), pension, etc. is exempt in most circumstances from collection by the IRS, state income tax agencies, and creditors (depending on your state), those accounts ARE INCLUDED in the computation of insolvency for purposes of the exclusion of Cancellation of Debt Income (CODI) from gross income in the year the debt was canceled.

To make matters worse, 100% of the value of the account contributes to your asset total, not just what would be left after paying income taxes on the pre-tax money sitting in the account.

However, the amount of loans taken against the account would also be included in the liabilities section, so you're really only stuck with including the net equity once it hits the bottom line.

Note that not only are the income tax consequences not taken into account, but neither is the 10% excise tax (penalty for early withdrawal) when computing the value of the asset.

Keep in mind that there are several exclusions available for avoiding the 10% penalty, such as liquidating to pay an IRS tax levy/lien. There are others as well, such as first-time homebuyers up to $10k, medical expenses, insurance premiums when you're unemployed, etc.

I do not know about whether the legal fees associated with negotiating the debt settlement would enter into the equation. It would if it were a debt owed to the attorney, of course. But prepaid ones might not. I've always had insolvent clients so that question has never been raised before.

Bottom line to a very long answer (sorry), is that you have to include exempt assets like retirement accounts in the computation for insolvency. Sucks considering those amounts are not available to a creditor seeking to satisfy a judgment, and they are typically exempt assets in Bankruptcy... but the IRS always gets to cheat the system.

I hope that helps.

Jeff


[SIZE=2]Jeff Johnston, J.D., LL.M. (Tax)
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Unregistered

Sub: #2 ira accountsThu, 06/09/2011 - 18:37



are ira accounts considered an asset when filing for insolvency with the IRS?


panddmccarthy@msn.com
aubrey


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Sub: #3 Tax Act softwareWed, 02/09/2011 - 06:18



Hey, thanks for the tip. I was going to use them since I heard Turbo Tax didn't have the capability. If anyone knows of any software, please advise as I won't pay to have my taxes done by someone else. I'll file paper returns if I have to.....


Unregistered

Sub: #4 I just tried Turbo Tax and it will not let me go foward with a 1Tue, 02/08/2011 - 21:43



I just tried Turbo Tax and it will not let me go foward with a 1099 A. I am trying to claim insolvency and it advised me to see a CPA, so that is what I'm doing. Going to cost me $600 but I have a BK, couple of short sales, etc. I do not think you'll find a software that will let you do it because it is too complex.


Unregistered

Sub: #5 Turbo TaxSat, 01/29/2011 - 15:37



Yes turbo tax does address insolvency it has form IRS 982, it just needs to update for 2010, but I was able to compete the form in the program. It was awesome...


Unregistered

Sub: #6 From what i get from the insolvency worksheet, only list the intFri, 01/21/2011 - 13:15



From what i get from the insolvency worksheet, only list the interest you have in the IRA.

My question goes back the beginning of this whole discussion. Since I can't rightly determine what my Fair market value of all my stuff was a year ago, do I just say, oK.... Got a washer and dryer here, looks good, I would pay 500.00 for it....? Is that how I am to determine FMV? Also, our canceled debt was a joint account, and so far, only I have received the 1099c. Do I just include my liabilities or the joint owners liabilities as well?


Unregistered

Sub: #7 I called the IRS and they told me to list my vehicle as an assetFri, 01/21/2011 - 08:19



I called the IRS and they told me to list my vehicle as an asset and a liability since its not paid off. Does anyone know if I am supposed to list an IRA as an asset?


Unregistered

Sub: #8 Don't use Tax Act. I used them last year and just got a letter fTue, 01/11/2011 - 11:43



Don't use Tax Act. I used them last year and just got a letter from the IRS because they incorrectly filed my return. So now I'm on here going through this again.

On a side note: Does anybody know how I should value my car in the Assets section?
I don't own it outright as I still have a loan with the bank.


Unregistered

Sub: #9 COD stands for Cancellation of Debt.Wed, 04/07/2010 - 16:35



COD stands for Cancellation of Debt.


Unregistered

Sub: #10 For insolvency what is the IRS definitition of Interest in 401K Fri, 04/02/2010 - 07:43



For insolvency what is the IRS definitition of Interest in 401K and Pensions. This answer determines if I am insolvent. I used 401K loans to settle with credit card companies, so no loans are available. It should not include the total shown, since it includes deferred taxes. If it were available to take out, it would be subject to taxes and penalties.
Also - can legal fees paid to settle the debt be deducted from the COD?


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