 |
Case Study 2: Insolvency (Beyond the scope of VITA/TCE)Michelle went to her local VITA/TCE site to have her federal tax return prepared. During the screening process, the VITA/TCE volunteer notices Michelle received a Form 1099-C from a credit card company indicating $3,000 of canceled debt in box 2. The volunteer asked Michelle what this was for, and Michelle stated she worked out a deal with one of her credit card companies where, if she paid $1,000 of the $4,000 balance due by a certain date, the balance would be canceled. The volunteer then asked Michelle if she thought her total debts were more than the value of all her assets at the time the debt from the credit card company was forgiven. Michelle's response was that she was not sure, but possibly. The volunteer filled out the Insolvency Determination Worksheet to determine if Michelle was insolvent. Is Michelle insolvent? Click here for an explanation. According to the Insolvency Determination Worksheet, Michelle is insolvent. At this time, Michelle should be told that the volunteer would be unable to assist her at the site and she may be better off seeking assistance from a professional tax preparer. The volunteer tells Michelle all or some of the canceled debt might not be taxable and she explains that VITA/TCE volunteers are not trained to compute the nontaxable portion of canceled credit card debt. Click here to review Michelle's Form 1099-C. Click here to review the Insolvency Determination Worksheet for Michelle's assets and liabilities. 
|
