When determining insolvency, what does the IRS consider assets?

Thanks for the reply.

But simply put, does everything in my house count as an asset.......if I were audited, would they consider the value of my furniture, golf clubs, kid's toys, etc? I know I am reaching, but I don't want to be suprised.

Or is an asset just limited to savings, checking, stocks, bonds, automobiles that are paid for, real estate owned, etc?

Some layman clarification would be much appreciated.

How about some clarification from an IRS licensed Enrolled Agent? I deal with this all the time, and here are my instructions to my clients:

1. List all your assets at the time of the COD. The valuation is "quick sale value", or what you would get by putting them on your lawn with a "For Sale" sign on them
2. List all your debts, including the one that was discharged.
3. Subtract the two and compare the difference to the COD. If the difference is larger than the COD then you can use Section 108b to exclude from income the COD to the extent it is less than or equals the difference between assets and liabilities.

There is no set way of valuing your assets - so I use Quick Sale value. That is the method used in an IRS Offer in Compromise, and since COD is similar to an Offer in Compromise a similar valuation method is appropriate.

OK, but what I am trying to understand is "what is an asset"?

Using the yard sale example, do I put everything I own on my yard? Or is just specific types of items? And my question is what are those items?

An asset is something (anything) that you own.

Glad to see you here Dr Tax.

When previously owed taxes for prior years are included in the Chapter 7 Bankruptcy, is this debt eliminated by the discharge of the Chapter 7?

Sometimes.

(Source: the IRS and "http://public.getlegal.com/legal-info-center/bankruptcy-faqs")

I would urge you to consult a tax attorney.

i own my q-tips... do i list that? Ok. I am being sarcastic, but seriously.... I am in same boat as person above. Do I list my kids action figures, and the flower pot... my pampered chef chopper... Things I own is just too vague of a catagory. A detailed list of every item is overwhelming. I don't want to get carried away with listing too many unimportant things, but at same time I don't want to NOT list something only to have it bite me in the butt. I have searched the internet looking for any kind of answer to this... a list or a guideline, and it is driving me crazy that all everyone says is "assets are anything you own." I have a deadline, and soooo much other paperwork to fill out, that I really don't want to have to count my whole family of five's underwear and socks!
ok. i am done venting.

I would just list all that stuff as "Personal effects, $500" and leave it at that.

List collective items together (for example, tables, chairs, and beds, list as ???furniture???), except for items worth more than $500, which must be listed separately.

You can list assets by groups of similar property, e.g. ???furniture,??? ???clothing,??? ???personal effects,??? etc. Provide the replacement value of each asset, which the price a store would charge for the property of that kind considering the age and condition of the property.

Pretty much as Guest said.

I found on the IRS site a manual of procedures that is written for the irs revenue officers to follow. it explains what they can and can't do in actual english instead of all that legal confusing lingo that they use to purposely confuse us. It is actually written for the irs employee, and it gives a BUNCH of information that I have found helpful in what they are looking for as far as assets and also, and this is VERY IMPORTANT and hard to find - there is a standard amount of personal property that is EXEMPT from a levy!!! it varies for each year based on inflation, but it is somewhere around 6,250 from what I have been able to find. They won't tell you about this amount either. You have to find this out on your own. I have also used a tax program deduction pro.for donations to help me determine what my furniture and stuff is worth. it was very helpful. Also, if you are in trouble of a levy or seizure of assets, from what I understand, they have to have reason to believe that what they seize would actually be worth the time and storage and trouble to apply a signifigant enough amount to your liability.

Please review IRS 4681, the insolvency worksheet shows everything that needs to be included....

If the bank forecloses, and gets a deficiency judgment, do I still get a 1099c filed against me? IS it better to owe the IRS or to have a deficiency judgment against me?
Regarding insolvency: My boyfriend lives w/ me in my house. How would the IRS determine what is my furniture, electronics etc vs his?

Does anyone know what online tax software (TaxAct, TurboTax, etc) will address insolvency and have the forms for it? I don't want to start working on it and realize that I can't use it.

Does anyone know what online tax software (TaxAct, TurboTax, etc) will address insolvency and have the forms for it? I don't want to start working on it and realize that I can't use it.
I settled 3 accounts and am not getting my 1099's for them. At the time of the cancellation of debt, I filled out an insolvency worksheet and was determined to be insolvent. I just want to make sure that I can express then when I file my taxes myself.

sorry, I meant I AM getting my 1099's

I just started filing and Turbo Tax does not over that form for insolvency. It referred me to contact a tax professional.

Taxact.com offers an insolvency worksheet. A little tricky to find though.

Can you please define COD?
Quote:

For insolvency what is the IRS definitition of Interest in 401K and Pensions. This answer determines if I am insolvent. I used 401K loans to settle with credit card companies, so no loans are available. It should not include the total shown, since it includes deferred taxes. If it were available to take out, it would be subject to taxes and penalties.
Also - can legal fees paid to settle the debt be deducted from the COD?

COD stands for Cancellation of Debt.

Don't use Tax Act. I used them last year and just got a letter from the IRS because they incorrectly filed my return. So now I'm on here going through this again.

On a side note: Does anybody know how I should value my car in the Assets section?
I don't own it outright as I still have a loan with the bank.

I called the IRS and they told me to list my vehicle as an asset and a liability since its not paid off. Does anyone know if I am supposed to list an IRA as an asset?

From what i get from the insolvency worksheet, only list the interest you have in the IRA.

My question goes back the beginning of this whole discussion. Since I can't rightly determine what my Fair market value of all my stuff was a year ago, do I just say, oK.... Got a washer and dryer here, looks good, I would pay 500.00 for it....? Is that how I am to determine FMV? Also, our canceled debt was a joint account, and so far, only I have received the 1099c. Do I just include my liabilities or the joint owners liabilities as well?

Yes turbo tax does address insolvency it has form IRS 982, it just needs to update for 2010, but I was able to compete the form in the program. It was awesome...

I just tried Turbo Tax and it will not let me go foward with a 1099 A. I am trying to claim insolvency and it advised me to see a CPA, so that is what I'm doing. Going to cost me $600 but I have a BK, couple of short sales, etc. I do not think you'll find a software that will let you do it because it is too complex.

Hey, thanks for the tip. I was going to use them since I heard Turbo Tax didn't have the capability. If anyone knows of any software, please advise as I won't pay to have my taxes done by someone else. I'll file paper returns if I have to.....

are ira accounts considered an asset when filing for insolvency with the IRS?

A prior member asked:

"For insolvency what is the IRS definition of Interest in 401K and Pensions. This answer determines if I am insolvent. I used 401K loans to settle with credit card companies, so no loans are available. It should not include the total shown, since it includes deferred taxes. If it were available to take out, it would be subject to taxes and penalties.
Also - can legal fees paid to settle the debt be deducted from the COD?"

You're not going to like the answer, I suspect. While your retirement accounts such as an IRA, 401(k), 403(b), pension, etc. is exempt in most circumstances from collection by the IRS, state income tax agencies, and creditors (depending on your state), those accounts ARE INCLUDED in the computation of insolvency for purposes of the exclusion of Cancellation of Debt Income (CODI) from gross income in the year the debt was canceled.

To make matters worse, 100% of the value of the account contributes to your asset total, not just what would be left after paying income taxes on the pre-tax money sitting in the account.

However, the amount of loans taken against the account would also be included in the liabilities section, so you're really only stuck with including the net equity once it hits the bottom line.

Note that not only are the income tax consequences not taken into account, but neither is the 10% excise tax (penalty for early withdrawal) when computing the value of the asset.

Keep in mind that there are several exclusions available for avoiding the 10% penalty, such as liquidating to pay an IRS tax levy/lien. There are others as well, such as first-time homebuyers up to $10k, medical expenses, insurance premiums when you're unemployed, etc.

I do not know about whether the legal fees associated with negotiating the debt settlement would enter into the equation. It would if it were a debt owed to the attorney, of course. But prepaid ones might not. I've always had insolvent clients so that question has never been raised before.

Bottom line to a very long answer (sorry), is that you have to include exempt assets like retirement accounts in the computation for insolvency. Sucks considering those amounts are not available to a creditor seeking to satisfy a judgment, and they are typically exempt assets in Bankruptcy... but the IRS always gets to cheat the system.

I hope that helps.

Jeff


[SIZE=2]Jeff Johnston, J.D., LL.M. (Tax)
Principal, Johnston Tax Group
Federal and state tax matters

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