Tax Preparer Course Covers Reporting of Unexpected Income

Before quickly filing a tax return, every taxpayer should exercise caution to assure that all income information is gathered. Nonrecurring unusual income can arise in some years that is easily overlooked in the haste to file for a refund. Because the process of tax preparer work entails collecting facts about clients, the resulting inquiries should reveal potential income sources.

When income is only discovered after a tax return is filed and refund issued, the IRS will send a notice demanding reimbursement of the overage refund. A tax preparer course coveys that an example of unexpected income is debt forgiveness. Reporting by creditors on 1099 forms causes the IRS to learn of borrowers not repaying money they received. Cancelled debt is considered income for the borrower when a liability is forgiven.

Although forgiven debt is usually taxable income, this is not always true. However, tax return preparer jobs must address any 1099 for debt cancellation even when the income is not taxable. Taxpayers with forgiven debt should wait until the due date for receiving 1099s before filing tax returns. They will need to obtain assistance from professionals with tax preparer training regarding how the cancelled debt impacts their tax returns.

In most cases, forgiven debt is added as miscellaneous income on a personal tax return. This might occur when someone settles a credit card balance of $10,000 for $8,000. The $2,000 balance cancelled by the lender is taxable. Fortunately, registered tax return preparer study reveals some ways to exclude cancelled debt from taxable income.

One of these avenues expires at the end of 2012. It is still available for 2011 and 2012 tax returns. Forgiven debt of up to $1,000,000 on a taxpayer’s principal residence is excluded from taxable income. For jointly filing married couples, the exclusion is $2,000,000. Not only is debt extinguished during a foreclosure eligible for this relief measure, but so is an amount forgiven when refinancing the mortgage on a principal residence.

Another means for averting the tax impact of cancelled debt occurs when liability is discharged in a bankruptcy. Also, some individuals may qualify for excluding forgiven debt as income by having insolvency status at the time debt is cancelled. They probably need to use tax preparation services for completion of the IRS form containing details to prove insolvency. A person is insolvent when the amount of debt owed exceeds assets.

IRS rules also provide an exclusion from taxable income for certain types of forgiven farm debts. This only benefits taxpayers earning more than half their income from agriculture in the past three years. In addition, the debt must have been incurred for operation of the farm.

Individuals with cancelled debt should work with a tax preparer professional to correctly identify the income tax impact instead of filing their returns without including this information.

IRS Circular 230 Disclosure

Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.

Fast Forward Academy is a leading publisher of education for tax preparer work and tax professionals. Access to free questions for the tax preparer course is available on their website.

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