A client forgot to tell me about their cancelled debt or give me their 1099-C when I prepared their 2013 return. When they got Notice CP3219A last month correcting their 2013 return by adding in the 1099-C, they paid the assessed deficiency without consulting me. It's likely they would have qualified for the insolvency exception, but before I discuss it with them I have a few questions:
The notice says "If the canceled debt is excludable due to insolvency, please provide us with a breakdown of your total assets and liabilities immediately before the debt was discharged.... A worksheet that you may use for calculating insolvency is included in Publication 4681...."
Had they given me the 1099-C back in 2014, I would have had them fill out that worksheet and (assuming they were insolvent at least to the amount of the cancelled debt) filed Form 982 along with the 1040, but not filed the worksheet itself. However, now that the IRS has specifically asked for a breakdown such as would appear on the worksheet, and the client instead sent them money, what should we do? File 1040X with Form 982 *and* the asset/liability worksheet?
Also, the client's 2015 return (not yet filed) shows a balance due greater than the potential refund from a 1040X. What are the pros and cons (besides the benefit to client's cash flow) of filling out the 1040X to have the 2013 refund applied to 2015 rather than sent as a check? If we do, should we wait a certain amount of time after filing the 1040X for 2013 before filing the 1040 for 2015?
Arizona's resident tax return bases its tax on the federal AGI, subject to various adjustments which don't apply to personal debt cancellation income. Therefore the Arizona return after amending would be identical to the originally filed return. I'm thinking we should not file anything with Arizona unless they send a notice to the taxpayer regarding the "correction" the IRS made. Does that sound advisable to you?
Thanks for your assistance, Ed