8 ms·

For the benefit of folks who might not understand how debt collection works, which may include OWS: if you buy $10,000 of an individual's debt for $500 and then

by patio11 14y ago

For the benefit of folks who might not understand how debt collection works, which may include OWS: if you buy $10,000 of an individual's debt for $500 and then forgive the debt, they have just incurred income of $10,000 and are obligated to pay taxes on it exactly as if you had handed them $10,000 in cash for services rendered. If you don't inform the IRS that you forgave the debt, via a 1099-C, you're going to get wrist-slapped mightily if they think it is an honest mistake or, if you're, say, doing it as a political statement, you will be afforded the opportunity to make your political statement in front of a judge hearing your case for criminal tax evasion. This is not accounting advice, by the way. There's some wrinkles if the debt was caused by your principal residence, due to some of the recovery measures passed two years ago. If its, say, CC or medical debt, though...

heyrhett 14y ago
Good point, patio11. If debtors don't pay back their debt after after a certain time period, they are supposed to report it as income, but I doubt very many do. Setting up an organization like this puts the onus on the organization to file the 1099-C's
- lifeguard 14y ago
  Unpaid interest owed on debt would never be income.
malandrew 14y ago
Couldn't OWS just hold it forever and not do anything with it? i.e. "Look I bought your debt, you don't have to pay me a penny for it ever, but I can't officially forgive you since to do so would subject you an income tax obligation. Just don't worry about it ever again and get on with your life."
- patio11 14y ago
  Conspiracy to commit tax fraud.
  - deleted 14y ago
    [deleted]
  - lifeguard 14y ago
    malandrew committed conspiracy with that post!
- tsotha 14y ago
  I'm not sure of the exact mechanism, but... no. This was a common money laundering tactic in the '80s and '90s. At some point the IRS can declare the debt forgiven regardless of whatever the debt holder says, in the same way they can declare your money-losing business a "hobby" if they think you're not actually trying to make money. The IRS has pretty wide latitude in these kinds of cases - I think the tax code is the only area of law where the government pretty much wins unless you prove your innocence.
- RollingJubilee 14y ago
  The main problem with that is that we would be collecting assets that we would then have to pay taxes on. Better to destroy the debt all together.
  - TheAmazingIdiot 14y ago
    Have you thought about creating a non-profit (or some corporate) and actively hide behind the corporate veil? When the shit hits the fan, suddenly there's nothing under that tablecloth...
  - tsotha 14y ago
    You wouldn't have to pay taxes if the assets you collected were less than what you paid for debts. If they were greater, well, that would make you just another bill collector.
namank 14y ago
If person A is in debt from Agency X, am I right in thinking that OWS would have to buy the debt from Agency X? They can't really buy debt from person A since A is in the hole... Or OWS would buy from person A and, by some weird tax provision, doesn't have to pay agency A the entire amount? Or...how does this actually work? Yeah, I know nothing about money.
- patio11 14y ago
  Person A bounces a credit card payment to MegaBank, MegaBank asserts their credit card is in default and demands full payment immediately, A does nothing, MegaBank attempts to collect fruitlessly for ~4 months, A does nothing, MegaBank sells debt (principal + interest) to Agency X, Agency X attempts to collect fruitlessly for 18 months, A does nothing, Agency X sells it to Agency Y, A does nothing, Agency Y attempts to collect fruitlessly for 12 months, A does nothing, Agency Y sells the debt to Agency Z, A does ntohing, Agency Z attempts to collect fruitlessly for 12 months, A does nothing, Agency Z sells the debt to OWS for 5 cents on the dollar. Each time I say "fruitlessly" read "They autodialed them between 2 and 5 times per week plus sent biweekly dunning letters." For your added edification, while MegaBank, Agency X, and Agency Y all have no interest in the debt after it is sold to Z, many of them have very terrible recordkeeping practices, so it is entirely possible that e.g. Agency X will attempt to collect on the debt even after selling it, and potentially even after it is cancelled by OWS. Person A may not notice that this has happened, because Person A is likely a) delinquent on more than a dozen similar debts and b) Person A very likely has a very different level of personal responsibility as compared to many people in your reference set.
  - namank 14y ago
    Much appreciated! Now I'm wondering what kind of business model Agency Y and Z operate on
    - patio11 14y ago
      A variation of "Buy debt at 25 cents on the dollar, collect 40 cents on the dollar in interest and fees, spend 8 cents on the dollar for high school graduates to man the phones and 5 cents on the dollar for overhead.", with numbers adjusted depending on how toxic their average pool of receivables is.
downandout 14y ago
I'm just thinking out loud here, but I would suspect that the IRS would only know that the debt was forgiven if the debt owner wrote the debt off as a loss on their taxes. If they simply hold it and do nothing, even if they deleted it from your credit record (which they can do), no taxable event would have occurred. I could be wrong in this crazy country of ours, but I believe there is no law requiring a debt owner to attempt to collect on it, or to write off a debt as noncollectable after a certain period of time.
- jlarocco 14y ago
  I'm not 100% sure, but I'd be completely shocked if the banks and credit card companies (or whoever) that sell the debt didn't have to report the sale to some government agency, or even the IRS itself, so the IRS could probably find out that way. And now that OWS has announced they're buying up debt and forgiving it, the IRS is going to have a pretty good idea what's going on...
  - RollingJubilee 14y ago
    Yes the IRS knows what we are doing. We called them up and told them. They thought it was pretty cool. w00t!
    - lifeisstillgood 14y ago
      Sorry I have to ask - "we called them up and told them" rarely works with my insurance company so ... whom did you talk to at the IRS - what's their seniority and pay grade and did they reply in writing?
      - lifeguard 14y ago
        You guys should keep in mind occupy 'interacts' with ALL levels of law enforcement on a daily basis. This is not our first rodeo.
    - mkr-hn 14y ago
      People are still hungover from the media myth that O* is a bunch of disorganized kids causing trouble.
citricsquid 14y ago
From what I can find: A bank will make a loan, after 120 (or 180) days of no payment the loan becomes "charged off", this means it's now tax-exempt The purpose of making such a declaration is to give the bank a tax exemption on the debt Then a debt buyer will purchase the value of the debt for a percentage A debt buyer is a company [..] that purchases delinquent or charged-off debts from a creditor for a fraction of the face value of the debt. with the pricing generally being Depending on the age and history of the debt, a buyer typically pays between 3 and 16 percent of the face value of the debt. Does this mean that the debt buyer than becomes in possession of the value of the debt for tax purposes, even after it has been charged-off by the company that initially granted the debt? or do they become in possessions of the amount paid (eg: buying $1,000 debt for $100, do they now own $1,000 for tax or $100?). Wikipedia isn't clear. quotes taken from: http://en.wikipedia.org/wiki/Debt_buyer http://en.wikipedia.org/wiki/Debt_buyer http://en.wikipedia.org/wiki/Charge-off http://en.wikipedia.org/wiki/Charge-off
- mediaman 14y ago
  Typically, the charge-off would be the difference between the original face value of the debt and the price it was sold to the debt collector. The debt collector's tax basis is the price they paid for the debt. If they fail to collect the debt, there is a net loss equal to what they paid for the debt. This tax loss can be set against other debts that are recovered (profits). If the full face value of the debt is recovered, the debt collector owes tax on the difference between their basis (what they paid for the debt) and the amount collected from the debtor. Of course, this profit is set against the losses on the remainder of the debt portfolio, so the net tax owed is the cumulative debts collected above the basis, less the loss on uncollected debt.
- lifeguard 14y ago
  The debt can be accounted for at least two ways: Full value and take an income loss on not collecting all of it. Income of what amount you DO collect. So in a sense occupy will have a tax shelter on their hands :-)
RollingJubilee 14y ago
Hi everyone. I want to assure you all that we are aware of the tax implications. We are working with a pro-bono tax lawyer and have called the IRS several times. The IRS informed us that we do not meet the requirements to file a 1099-c (we are not a bank, credit union, etc.) Our tax lawyer has written some technical langue for our website. The bottom line is that we will be purchasing debt of people who are most likely insolvent and if you are insolvent there is no tax implications. Period. Even if they are not insolvent the chain of events that would have to take place to result in this counting as taxable income is highly unlikely. It's not impossible, but it's very very very (lots more verys) unlikely. The long answer is much longer and more technical but rest assured, we are aware of the tax implications and it's not a problem.
- philwelch 14y ago
  If these people are insolvent, why can't they just declare bankruptcy?
  - RyJones 14y ago
    it's expensive and means-tested. You don't get to keep everything, even if everything doesn't amount to much.
    - eupharis 14y ago
      Expensive in this case (for the US) meaning $700 to $2000. Which is rather a lot for the insolvent. Not to mention the paperwork sounds like an ordeal. I think there is a psychological block for a lot of people too. It takes a certain point-of-view and education to be able to enter into lending arrangements with creditors with the perspective: "I believe I am going to make a profit and we will both win. But there is a chance I will not be able to. The lender is self-consciously taking a risk, which they are being compensated for via interest (same basic principle with an investor). If things go badly and I need to declare bankruptcy, then well, yes, it sucks. But I have done nothing morally wrong." Fun fact: Henry Ford, Abraham Lincoln, and Walt Disney declared bankruptcy.
rprasad 14y ago
if you buy $10,000 of an individual's debt for $500 and then forgive the debt, they have just incurred income of $10,000 and are obligated to pay taxes on it exactly as if you had handed them $10,000 in cash for services rendered. It could alternatively be characterized as a gift, in which case it is not income to the recipient (but could incur gift taxes to the "gifter"). If you don't inform the IRS that you forgave the debt, via a 1099-C, you're going to get wrist-slapped mightily if they think it is an honest mistake or, if you're, say, doing it as a political statement, you will be afforded the opportunity to make your political statement in front of a judge hearing your case for criminal tax evasion. No. If it is treated as a gift--gifts under a certain size do not need to be declared. If it is not treated as a gift, only a creditor that is a financial institution is required to file a Form 1099-C. loan. 1099-C is only required for financial institutions or entities engaged in the business of lending money. http://www.irs.gov/pub/irs-pdf/i1099ac.pdf http://www.irs.gov/pub/irs-pdf/i1099ac.pdf. Moreover, the IRS does exercise discretion over pursuing cases--as the OP has already indicated, they have provided their blessing to these transactions and it is unlikely that any negative tax consequences will accrue (especially in this political environment).
- saraid216 14y ago
  But gifts are capped at $12,000 per year, which puts something of a damper on the whole point of this, unless they've figured out a legal way to farm out who gets credit. So either they've promised not to go after these cases, or ... something else?
  - aarondf 14y ago
    Actually 13,000 per individual, so 26,000 to the household if married. And 52,000 if given from one couple to another (think parents to child+spouse.) (CPA in Texas)
    - shiftpgdn 14y ago
      Hopefully you see this but can you send me an email? J@squid.nu . I am in dire need of a competent CPA.
scythe 14y ago
Fifth paragraph: >Now, after many consultations with attorneys, the IRS, and our moles in the debt-brokerage world... I'm guessing they know what they're doing.
lifeguard 14y ago
@patio11, you need to understand two important facts: 1. The executive branch has broad discretion about bringing people to the judiciary branch for sanction. For example, district attorneys do not prosecute every case brought to them. 2. Occupy has excellent legal council. At the local, state, and federal level the few (none?) of the cases that have been brought to court have resulted in a conviction. I cite the victory record as proof of their skill and occupy's integrity, not of a lust for litigation. Don't hate the players, hate the game.
bravoyankee 14y ago
Patrick, isn't this like saying that since steak knives are potentially dangerous, they should be illegal to use at the dinner table? You have to admit that the upside of this is greater than the downside. Lets focus on that.
downandout 14y ago
Why not ask the people to make nominal payments, and use those payments to purchase additional discounted debt? This would both solve the IRS problem and potentially make this a self-sustaining venture.
- hnal943 14y ago
  ...because this is the debt of people who don't pay their debts?
  - downandout 14y ago
    Well, you could actually use the tax issue as a powerful incentive to pay. "You have a choice: you can pay a small amount every month, or we can write your debt off in full. However, if you choose the write-off, please be aware that you will be liable to the IRS for the full amount of the taxes. You may find it easier to work with us rather than them".
- neilk 14y ago
  I think you just described the business model of a collection agency.

by patio11 14y ago

heyrhett 14y ago

Good point, patio11. If debtors don't pay back their debt after after a certain time period, they are supposed to report it as income, but I doubt very many do. Setting up an organization like this puts the onus on the organization to file the 1099-C's

lifeguard 14y ago
Unpaid interest owed on debt would never be income.

malandrew 14y ago

Couldn't OWS just hold it forever and not do anything with it? i.e. "Look I bought your debt, you don't have to pay me a penny for it ever, but I can't officially forgive you since to do so would subject you an income tax obligation. Just don't worry about it ever again and get on with your life."

patio11 14y ago
Conspiracy to commit tax fraud.
- deleted 14y ago
  [deleted]
- lifeguard 14y ago
  malandrew committed conspiracy with that post!
tsotha 14y ago
I'm not sure of the exact mechanism, but... no. This was a common money laundering tactic in the '80s and '90s. At some point the IRS can declare the debt forgiven regardless of whatever the debt holder says, in the same way they can declare your money-losing business a "hobby" if they think you're not actually trying to make money. The IRS has pretty wide latitude in these kinds of cases - I think the tax code is the only area of law where the government pretty much wins unless you prove your innocence.
RollingJubilee 14y ago
The main problem with that is that we would be collecting assets that we would then have to pay taxes on. Better to destroy the debt all together.
- TheAmazingIdiot 14y ago
  Have you thought about creating a non-profit (or some corporate) and actively hide behind the corporate veil? When the shit hits the fan, suddenly there's nothing under that tablecloth...
- tsotha 14y ago
  You wouldn't have to pay taxes if the assets you collected were less than what you paid for debts. If they were greater, well, that would make you just another bill collector.

namank 14y ago

If person A is in debt from Agency X, am I right in thinking that OWS would have to buy the debt from Agency X? They can't really buy debt from person A since A is in the hole... Or OWS would buy from person A and, by some weird tax provision, doesn't have to pay agency A the entire amount? Or...how does this actually work? Yeah, I know nothing about money.

patio11 14y ago
Person A bounces a credit card payment to MegaBank, MegaBank asserts their credit card is in default and demands full payment immediately, A does nothing, MegaBank attempts to collect fruitlessly for ~4 months, A does nothing, MegaBank sells debt (principal + interest) to Agency X, Agency X attempts to collect fruitlessly for 18 months, A does nothing, Agency X sells it to Agency Y, A does nothing, Agency Y attempts to collect fruitlessly for 12 months, A does nothing, Agency Y sells the debt to Agency Z, A does ntohing, Agency Z attempts to collect fruitlessly for 12 months, A does nothing, Agency Z sells the debt to OWS for 5 cents on the dollar. Each time I say "fruitlessly" read "They autodialed them between 2 and 5 times per week plus sent biweekly dunning letters." For your added edification, while MegaBank, Agency X, and Agency Y all have no interest in the debt after it is sold to Z, many of them have very terrible recordkeeping practices, so it is entirely possible that e.g. Agency X will attempt to collect on the debt even after selling it, and potentially even after it is cancelled by OWS. Person A may not notice that this has happened, because Person A is likely a) delinquent on more than a dozen similar debts and b) Person A very likely has a very different level of personal responsibility as compared to many people in your reference set.
- namank 14y ago
  Much appreciated! Now I'm wondering what kind of business model Agency Y and Z operate on
  - patio11 14y ago
    A variation of "Buy debt at 25 cents on the dollar, collect 40 cents on the dollar in interest and fees, spend 8 cents on the dollar for high school graduates to man the phones and 5 cents on the dollar for overhead.", with numbers adjusted depending on how toxic their average pool of receivables is.

downandout 14y ago

I'm just thinking out loud here, but I would suspect that the IRS would only know that the debt was forgiven if the debt owner wrote the debt off as a loss on their taxes. If they simply hold it and do nothing, even if they deleted it from your credit record (which they can do), no taxable event would have occurred. I could be wrong in this crazy country of ours, but I believe there is no law requiring a debt owner to attempt to collect on it, or to write off a debt as noncollectable after a certain period of time.

jlarocco 14y ago
I'm not 100% sure, but I'd be completely shocked if the banks and credit card companies (or whoever) that sell the debt didn't have to report the sale to some government agency, or even the IRS itself, so the IRS could probably find out that way. And now that OWS has announced they're buying up debt and forgiving it, the IRS is going to have a pretty good idea what's going on...
- RollingJubilee 14y ago
  Yes the IRS knows what we are doing. We called them up and told them. They thought it was pretty cool. w00t!
  - lifeisstillgood 14y ago
    Sorry I have to ask - "we called them up and told them" rarely works with my insurance company so ... whom did you talk to at the IRS - what's their seniority and pay grade and did they reply in writing?
    - lifeguard 14y ago
      You guys should keep in mind occupy 'interacts' with ALL levels of law enforcement on a daily basis. This is not our first rodeo.
  - mkr-hn 14y ago
    People are still hungover from the media myth that O* is a bunch of disorganized kids causing trouble.

citricsquid 14y ago

From what I can find: A bank will make a loan, after 120 (or 180) days of no payment the loan becomes "charged off", this means it's now tax-exempt The purpose of making such a declaration is to give the bank a tax exemption on the debt Then a debt buyer will purchase the value of the debt for a percentage A debt buyer is a company [..] that purchases delinquent or charged-off debts from a creditor for a fraction of the face value of the debt. with the pricing generally being Depending on the age and history of the debt, a buyer typically pays between 3 and 16 percent of the face value of the debt. Does this mean that the debt buyer than becomes in possession of the value of the debt for tax purposes, even after it has been charged-off by the company that initially granted the debt? or do they become in possessions of the amount paid (eg: buying $1,000 debt for $100, do they now own $1,000 for tax or $100?). Wikipedia isn't clear. quotes taken from: http://en.wikipedia.org/wiki/Debt_buyer http://en.wikipedia.org/wiki/Debt_buyer http://en.wikipedia.org/wiki/Charge-off http://en.wikipedia.org/wiki/Charge-off

mediaman 14y ago
Typically, the charge-off would be the difference between the original face value of the debt and the price it was sold to the debt collector. The debt collector's tax basis is the price they paid for the debt. If they fail to collect the debt, there is a net loss equal to what they paid for the debt. This tax loss can be set against other debts that are recovered (profits). If the full face value of the debt is recovered, the debt collector owes tax on the difference between their basis (what they paid for the debt) and the amount collected from the debtor. Of course, this profit is set against the losses on the remainder of the debt portfolio, so the net tax owed is the cumulative debts collected above the basis, less the loss on uncollected debt.
lifeguard 14y ago
The debt can be accounted for at least two ways: Full value and take an income loss on not collecting all of it. Income of what amount you DO collect. So in a sense occupy will have a tax shelter on their hands :-)

RollingJubilee 14y ago

Hi everyone. I want to assure you all that we are aware of the tax implications. We are working with a pro-bono tax lawyer and have called the IRS several times. The IRS informed us that we do not meet the requirements to file a 1099-c (we are not a bank, credit union, etc.) Our tax lawyer has written some technical langue for our website. The bottom line is that we will be purchasing debt of people who are most likely insolvent and if you are insolvent there is no tax implications. Period. Even if they are not insolvent the chain of events that would have to take place to result in this counting as taxable income is highly unlikely. It's not impossible, but it's very very very (lots more verys) unlikely. The long answer is much longer and more technical but rest assured, we are aware of the tax implications and it's not a problem.

philwelch 14y ago
If these people are insolvent, why can't they just declare bankruptcy?
- RyJones 14y ago
  it's expensive and means-tested. You don't get to keep everything, even if everything doesn't amount to much.
  - eupharis 14y ago
    Expensive in this case (for the US) meaning $700 to $2000. Which is rather a lot for the insolvent. Not to mention the paperwork sounds like an ordeal. I think there is a psychological block for a lot of people too. It takes a certain point-of-view and education to be able to enter into lending arrangements with creditors with the perspective: "I believe I am going to make a profit and we will both win. But there is a chance I will not be able to. The lender is self-consciously taking a risk, which they are being compensated for via interest (same basic principle with an investor). If things go badly and I need to declare bankruptcy, then well, yes, it sucks. But I have done nothing morally wrong." Fun fact: Henry Ford, Abraham Lincoln, and Walt Disney declared bankruptcy.

rprasad 14y ago

if you buy $10,000 of an individual's debt for $500 and then forgive the debt, they have just incurred income of $10,000 and are obligated to pay taxes on it exactly as if you had handed them $10,000 in cash for services rendered. It could alternatively be characterized as a gift, in which case it is not income to the recipient (but could incur gift taxes to the "gifter"). If you don't inform the IRS that you forgave the debt, via a 1099-C, you're going to get wrist-slapped mightily if they think it is an honest mistake or, if you're, say, doing it as a political statement, you will be afforded the opportunity to make your political statement in front of a judge hearing your case for criminal tax evasion. No. If it is treated as a gift--gifts under a certain size do not need to be declared. If it is not treated as a gift, only a creditor that is a financial institution is required to file a Form 1099-C. loan. 1099-C is only required for financial institutions or entities engaged in the business of lending money. http://www.irs.gov/pub/irs-pdf/i1099ac.pdf http://www.irs.gov/pub/irs-pdf/i1099ac.pdf. Moreover, the IRS does exercise discretion over pursuing cases--as the OP has already indicated, they have provided their blessing to these transactions and it is unlikely that any negative tax consequences will accrue (especially in this political environment).

saraid216 14y ago
But gifts are capped at $12,000 per year, which puts something of a damper on the whole point of this, unless they've figured out a legal way to farm out who gets credit. So either they've promised not to go after these cases, or ... something else?
- aarondf 14y ago
  Actually 13,000 per individual, so 26,000 to the household if married. And 52,000 if given from one couple to another (think parents to child+spouse.) (CPA in Texas)
  - shiftpgdn 14y ago
    Hopefully you see this but can you send me an email? J@squid.nu . I am in dire need of a competent CPA.

scythe 14y ago

Fifth paragraph: >Now, after many consultations with attorneys, the IRS, and our moles in the debt-brokerage world... I'm guessing they know what they're doing.

lifeguard 14y ago

@patio11, you need to understand two important facts: 1. The executive branch has broad discretion about bringing people to the judiciary branch for sanction. For example, district attorneys do not prosecute every case brought to them. 2. Occupy has excellent legal council. At the local, state, and federal level the few (none?) of the cases that have been brought to court have resulted in a conviction. I cite the victory record as proof of their skill and occupy's integrity, not of a lust for litigation. Don't hate the players, hate the game.

bravoyankee 14y ago

Patrick, isn't this like saying that since steak knives are potentially dangerous, they should be illegal to use at the dinner table? You have to admit that the upside of this is greater than the downside. Lets focus on that.

downandout 14y ago

Why not ask the people to make nominal payments, and use those payments to purchase additional discounted debt? This would both solve the IRS problem and potentially make this a self-sustaining venture.

hnal943 14y ago
...because this is the debt of people who don't pay their debts?
- downandout 14y ago
  Well, you could actually use the tax issue as a powerful incentive to pay. "You have a choice: you can pay a small amount every month, or we can write your debt off in full. However, if you choose the write-off, please be aware that you will be liable to the IRS for the full amount of the taxes. You may find it easier to work with us rather than them".
neilk 14y ago
I think you just described the business model of a collection agency.