Chapter 7 & IRS Question

[B12]

Found this link

http://www.franklindebtrelief.com/1099-c-faqs.html

Maybe the last paragraph refers to chap7?

[Bandit]

Don`t forget that there are thresholds that are in place, another words on my 2004 taxes of which I could have ficticiously added another $50,000.00 to my deductions, the refund would not have changed from the present one I received.

That must be where the cap is placed then, (?) on the amount of refund.

[B12]

Okay, another hitch to this ongoing saga.

If you receive the 1099c, then you attach yet another form when filing taxes saying that you are insolvent (chap7) and the forgiven debt is not treated as income.

Yeaaaaaaaaaaaaaaaaaaaaaaaaaaaa.

Basically, just file your taxes after BK as you normally would and don't worry about past deductions. (in chap7)

[Granny]

but if you made 25,000 you probably wouldn't have a 100,000 credit line???? That would be my guess.

The credit line could have been received in prior years, when income was higher, then some unfortunate circumstances caused the income to drop to the 25,000

[Granny]

However, the cc company files a discharge of indebtness statement and you receive a 1099 (income) for the debt discharged. He said that he has never seen a BK client NOT receive this 1099.

In essence, the IRS is making you claim as income any debt that has been charged to a cc, and actually not paid, because that cc debt is discharged.

Bad news, I would say. But, it makes sense.

I would bet that the credit card company wrote off the account and therefore triggered the 1099 long before the person actually filed BK. You've seen it here, most people are not current on the cc payments when they file. Most people are dealing with judgements, lawsuits and third party collectors. All of which would most likely generate a 1099.

I filed last year and didn't receive one 1099 because I was current on my cards until the day I filed.

[Lindsay]

This situation has me confused. We don't itemize, but we do use Schedule C for our eBay business. I'm not sure of exact figures without my returns nearby, but lets say $10,000 was charged in business merchandise for resale. If we had $20,000 in sales and took the deduction for cost of merchandise purchased for resale, this leaves $10,000 in taxable income for the business. Was it improper to take that deduction because it was charged on a credit card that wasn't fully paid off by that tax year? This is how I've always done it and I've put the individual credit card bills in a binder with the business expense circled in case of an audit at a later time.

We didn't intend on filing bankruptcy when we made business charges. We've been in financial trouble for years, but I didn't really consider bankruptcy seriously until recently. I was hoping to settle or work out agreements with my creditors instead, but this wasn't working out so good. I also always had hope that the business would suddenly get better or I'd find a product that would make great profits. The business played a good part in the bankruptcy and also my husband's low income and refusal to get a better job. In addition, late last year, our area was declared a FEMA disaster location due to a bizarre storm which caused the lower level of our home to flood and I lost thousands of dollars in merchandise that was stored there and alot of paperwork. We had no water/flood insurance as we usually don't get that kind of situation in NY. I didn't take a deduction for the loss, I probably should have but I figured that it would be hard to prove if audited. Plus the destroyed merchandise was in a very disgusting state from the flood, we managed to clean it up and get it all bagged up for garbage ourselves, but some of our neighbors had to have the HAZ-MAT teams come assist them. I photographed the destroyed stuff and the huge pile of bagged garbage in clear bags afterwards, but that was all I could think to do at the time.

I guess my question would be that how would they know how much of the deduction was paid already on the credit cards and how much wasn't? If I charged $10,000 in business merchandise in 2004, but I've been making payments on these cards until just a few months ago, how do they determine how much of that deduction was already paid back to my creditor? Obviously if I file bankruptcy, some of this debt is business debt. I can see the deductions taken from the most recent 2006 tax return, but could they go back years? I could see if I charged a large amount, never paid anything, filed BK, and took the deduction, but what about if payments were being made all along?

I guess my question for Granny is that after I file for BK, should I go back and amend my last years tax return and remove all business deductions that were paid with a credit card that will be included in bankruptcy? Or should I wait to file BK until after Dec 31 and file the next return without any deductions paid via credit card?

This thread is amazing as I've never really considered that this could happen.

[Granny]

This situation has me confused.

Lindsay,

I sent you a PM message.

Granny

[B12]

You are okay, Lindsay, because the merchandise was "paid" by cc in the tax year that you deducted it.

As someone advised here, (will have to look back to see who it was) you do not go back and amend the return.

Are you filing 7 or 13? 7, you claim that you are insolvent, 13, you need to deal with the discharged debt as income.

[PaKettle]

Tax laws are very clear. If you pay something with a credit card in a tax year it is considered paid! You do not have to pay the credit card bill for it to be considered paid. Here's another example of how this works....you could donate $5000 to March of Dimes on Decemeber 31, 2007, charge it on your Hooters Mastercard...do your Taxes on January 1st, 2008 and take it as a charit. dedudction for 2007! As long as its charged in 2007. Goes for both donations and deductions of any kind. The bankruptcy, in my opinion was unknown, came in the future, and is therefore a non-issue and should be fought and won!!!!! Check out the IRS publications on deductions. It is there is black and white re: credit cards and says as long as its "charged on the credit card in the tax year." end of story.

This is exactly how I was figuring it. Of course, knowing the insanity of the IRS who knows if they have some other kind of logic - or illogic - they might add in to the reasoning, via some clause or sub-clause?!

But I can't imagine that they can penalize you and make you pay back taxes for something that happens AFTER the bills were PAID by credit card and you LEGITIMATELY received a tax refund based on those paid bills. I think - and certainly HOPE - your analysis is correct.

The bottom line is, the medical or dental practitioners RECEIVED the money and used it as they wished. How can anyone then turn around and say those deductions were not legitimate? The bill was paid. Period.

That's my stance, and I'm sticking with it!

The bottom line is I just hope no one else here gets audited for it!

[CATCHMEIFYOUCAN]

Louis ! Another Comment from Lawyers Message Board

By: catchmeifyoucan Consumer
Date: 9/24/2007 5:49:00 PM Member Since: 6/1/2006

I proposed this question from someone I know who was going through this dilemma. Now I'm wondering if that goes the same with gambling! Since most of my credit cards were used for gambling. I was discharged just this past January!
I have been gambling for the past several years and have been able to write off my wins every year thus far.
Any thoughts?

By: Taxagent Lawyer

[Louis]

By: catchmeifyoucan Consumer
Date: 9/24/2007 5:49:00 PM Member Since: 6/1/2006

I proposed this question from someone I know who was going through this dilemma. Now I'm wondering if that goes the same with gambling! Since most of my credit cards were used for gambling. I was discharged just this past January!
I have been gambling for the past several years and have been able to write off my wins every year thus far.
Any thoughts?

By: Taxagent Lawyer

You get to deduct the gambling losses against your winnings because you actually spent the money . The fact that the money came from credit cards is not relevant . It is treated as though you borrowed cash and the lost the cash gambling. In that case, the casino got paid, and thus you incurred a gambling loss . This assumes that at the time you incurred the credit card debt you intended to repay it

In conclusion, it seems as though my inital question has been throughly answered. My medical expenses are allowable under the IRS rules.

Now I just need to make sure my auditor reads that part of the tax laws very close or I will have to immediately go to appleals with the issue.


By the way, I see in your signature that your case was discharged in January, but has still not closed. This seems strange to me, do you know why they are taking so long to close it ?

[CATCHMEIFYOUCAN]

I have no clue, I email my lawyer once a month for every month it has stayed open, probably time I email him again! As the report states:

Full docket text for document 39:
Trustee Report of No Distribution. Trustee of this estate reports and certifies that the trustee has performed the duties required of a trustee under 11 U.S.C. 704 and has concluded that there are no assets to administer for the benefit of creditors of this estate. I have received no funds or property of the estate, and paid no monies on account of the estate. Wherefore, the trustee prays that this report be approved and the trustee be discharged from office.


Maybe my file has been burnt from sitting on the back burner.


Best to YOU, Catchmeifyoucan

[Louis]

I have no clue, I email my lawyer once a month for every month it has stayed open, probably time I email him again!

Why not call the trustee or BK court yourself and find out ?

I did that a few times when I was going through the process and they were helpful

[CATCHMEIFYOUCAN]

Louis

IM A DUMMY, I DONT KNOW THE NUMBER ? !

CATCHMEIFYOUCAN

[SinkingFast]

I realize I'm a little late coming in here, but,..........

We were audited once years ago. The Lady we got was very nice. The Letter the IRS sent was very explicit in what records they wanted to see and what issues they were interested in. Our audit went fine and the net result was "No Changes".

The Auditor did explain to us how the IRS flags a tax return for Audit. A certain number of Audits are random. Much like the 1 in 250 BK Audits. Others aren't.

Every line you fill in, every year, gets assigned "points" as the Auditor called it. Over a period of a few years, you establish an average point value on your returns.

Then, say you have an extraordinary year where something, or several things happen. That causes your points value to swing out of the "normal" range. The computer kicks your return out for a Human review.

If the Human decides that your expenses look legit, your return gets passed on. If the Human decides that further documentation is warranted, then you get pinged for an Audit.

So your increased medical expenses were the start of the Audit process. Evidently those $$$'s deductions seemed too extraordinary and the IRS wanted verification. But now you're caught in the whole BK quagmire.

Have you thought about Consulting with a Tax attny?? Get their take on where you stand regarding the deductibility of the Discharged portion of the medical bills??