5 ms·
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 ex
by 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 agoBut 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 agoActually 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)
- rprasad 14y agoIt is my understanding that this is how it works: OWS volunteers will buy the loan (not OWS itself, I use OWS in the collective sense). They will then collectively forgive the loan. Since each loan is held and forgiven by a group of people, no one individual is likely to come close to the yearly gift cap. Individuals can participate in the OWS loan purchases until they run into the wall (i.e., their ability to participate in the purchase or to make further gifts). Note that this is why I assume the OWS loan forgiveness is treated as a gift--because in the above scenario, that is clearly the intent. Alternatively, OWS would purchase the loan itself and then forgive the loan. OWS is a non-profit entity, so there would not appear to be any tax issues arising from this (or at least, if there are, the IRS has already indicated that such issues will ignored).
- lifeguard 14y agoEpic diffusion of economic power (and risk)!
- benmmurphy 14y agoForgetting the law but looking at this from the governments tax collecting point of view the bank has incurred a loss which they deduct from their taxes and this needs to be offset by income from the person who has their loan forgiven. If this doesn't happen then the government loses revenue and it also opens up the possibility of people using loan forgiveness to dodge taxes.
- tptacek 14y ago'rprasad is a tax lawyer.
- rprasad 14y agoOccupy Wall Street is not a bank. They are purchasing the loan from the bank. The bank may be able to take a loss on the sale of the loan to OWS, but that is irrelevant to what OWS does with the loan once it is their property. If this doesn't happen then the government loses revenue and it also opens up the possibility of people using loan forgiveness to dodge taxes. Well, yes. And the IRS will certainly pursue cases where it is clear that loan forgiveness is used to dodge taxes. But that is not what is happening here. OWS is purchasing loans to help people get out from crushing insolvency. The alternative is the debtor's declaring bankruptcy, in which case no one--not the government, nor the private creditors--gets anything. Note also that OWS is a non-profit entity, so issues of tax revenue loss are generally irrelevant.
- tsotha 14y ago>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). Rule of law. Who needs that old thing anyway?
- tripzilch 14y agoAlso it would be kind of unfair, if the government could spend loads of the people's money to bail out banks, but the people can't spend money to bail out people ... I know, "fair" doesn't necessarily have much to do with law, but still.