Other Tax Questions
Questions and comments on other topics covered in Fairmark.com, such as UTMA accounts, and any tax questions that don't fit our other categories.
1099-C for deceased tax payer
Posted by: Ludwig, March 3, 2006 05:33AM
A widow of a man who died intestate in 2003 did not file a tax return for that year.
Her husband had substantial credit card debt, in his name only, when he died and 1099-C forms were issued with his SSN after his death. Neither the man nor his wife had any assets other than tax withheld from paychecks. No probate court, CPA, or attorney was involved in settling the "estate", and no TIN was obtained for the "estate", and no 1041 filed.
Is the 1099-C income from cancellation of debt "income in respect of a decedent", reportable on Form 1041 and not on a joint filed 1040?
If so, is the possibility of having the income non taxable due to insolvency lost due to the delay in filing a 1041?
As the 1099-C income exceeded $600, (requiring a 1041 to be filed ?), and as no personal representative was appointed, who would the IRS hold responsible for the penalty for non-filing or late filing?
If a 1041 were filed with the widow "inheriting" the cancellation of debt income, (assuming insolvency can't be claimed due to late filing), would the IRS be able to collect from her low social security payments, which are her only source of income?

Re: 1099-C for deceased tax payer
Posted by: LJM, March 6, 2006 02:51PM
It is only income if the estate was NOT bankrupt or NOT insolvent.

I wouldn't file anything. I would keep records indicating that the deceased was solely responsible for the debt, and that the deceased was insolvent.



Lewis

Re: 1099-C for deceased tax payer
Posted by: Ludwig, March 6, 2006 09:41PM
Would you advise against filing a joint tax return for 2003 so the widow can get a refund of tax withheld from her deceased husbands pay?
The estate did not file for bankruptcy, but the deceased was insolvent. As I understand it, there is a time limit, now long expired, to claim cancellation of debt income is not taxable to the extent of insolvency, and there are IRS penalties for not reporting IRD if over $600, or paying taxes if owed. If the IRS (the only entity with anything to gain) were to open the estate and have an administrator appointed, it would seem the widow could "inherit" the IRD and be assessed tax on the "income". While I doubt this will happen, is there anything to say it can't?

Re: 1099-C for deceased tax payer
Posted by: LJM, March 7, 2006 03:57PM
I would file a 2003 return. There is no guarantee that the IRS won't try for a recovery, but that is true with or without filing a tax return. If the widow's assets are minimal, by law the worst that would happen is a few dollars a week deducted from a garnished paycheck (and Social Security is exempt from garnishment).

It seems like there are two separate issues.

1. Excess withholding.
Widow should file a joint return for tax year 2003 to claim a refund for the withholding. To obtain a refund for tax year 2003, the return must be filed before the 3-year statute of limitations runs out on April 15, 2007 (next year). The following items should be added to the tax return:
a. On top of the return above the names:
"DECEASED Decedent's Name Date of Death: xx/xx/xx"
b. In the box for the decedent's signature put:
"Filing As Surviving Spouse".

2. 1099-C
You are supposed to file Form 982 (Reduction of Tax Attributes due to Discharge of Indebtedness) with your tax return in a "timely manner" to indicate that the debt has been forgiven. Obviously this is not going to happen for tax year 2003. I don't imagine that you will suffer an consequences for filing late. Since all you are discharging is credit card debt, on Form 982 fill out:
a. Box 1b (indicating insolvency, which means debts larger than assets)
b. Line 2 - amount of debt that was discharged (as indicated on 1099-C.

For Form 982 see:
[www.irs.gov]

Lewis



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