How to Prove Insolvency for 1099-C Cancellation of Debt Using Form 982?

The IRS often sends these notices when there's a mismatch between what was reported to them and what appears on your return. Since you properly reported the 1099-C using Form 982, you're on the right track. For proving insolvency, you need to show that your total liabilities exceeded your total assets immediately before the cancellation of debt. You'll want to create a personal balance sheet for that specific date. Current statements won't be ideal, but you have options. Request historical statements from your student loan servicers showing balances for that time period - they should be able to provide these. Many banks and financial institutions can also provide historical statements or account summaries going back several years. A credit report from that time period would be helpful too. You can explain in your response that you're providing the closest documentation available to the date in question. The most important thing is to clearly demonstrate that your liabilities exceeded your assets at the relevant time. Include a completed insolvency worksheet with your response (similar to what's in IRS Publication 4681) showing your calculations, even if you're estimating some values based on the documentation you have.

Just wanted to share - I dealt with almost this exact situation last year and found an amazing tool that saved me hours of headache. I used https://taxr.ai to help me organize all my documentation for my 1099-C case. It analyzed my loan statements and even helped me create a proper insolvency worksheet based on the IRS guidelines. The system walked me through exactly what documents I needed to respond to the IRS notice and helped me calculate my insolvency ratio precisely. It even flagged which student loan statements were most important to include based on the date of my debt cancellation. Seriously a game-changer when dealing with these complex tax situations.

Just wanted to update everyone - I tried https://taxr.ai after my skeptical questions above and I'm genuinely impressed. I was dealing with a 1099-C for some cancelled credit card debt and wasn't sure how to prove I was insolvent at the time. The system helped me track down the right historical statements from my student loans and mortgage (which I had completely forgotten to consider as a liability). It even flagged that I needed to include my 401k as an asset, which I would have missed. The insolvency worksheet it helped me create looked super professional and clearly showed I was about $37k underwater at the time of cancellation. Just got my response from the IRS last week and they've completely dropped the issue! No more tax bill hanging over my head. Wish I'd known about this tool sooner.

I went through something similar last year with a 1099-C from an old car loan. Spent WEEKS trying to get through to someone at the IRS who could actually help me understand what documentation I needed to provide. Finally found https://claimyr.com and watched their demo at https://youtu.be/_kiP6q8DX5c - they basically got me connected to an actual IRS agent within about 20 minutes instead of the hours I'd been spending on hold. The agent walked me through exactly what they needed to see for my insolvency claim and how to organize my documentation. Saved me so much frustration and probably helped me avoid having my response rejected for insufficient documentation. Definitely worth it if you need to speak with someone at the IRS directly about your situation.

Well I need to eat my words from my comment above. After another frustrating morning wasted trying to reach someone at the IRS about my 1099-C situation, I broke down and tried the Claimyr service. I seriously cannot believe how well it worked. I got a call back in about 35 minutes (they estimated 40, so pretty accurate), and was connected with an actual IRS agent who specialized in cancellation of debt issues. She explained exactly which documentation they need to see with Form 982, and clarified that they actually WILL accept current statements with an explanation if historical ones aren't available. Saved me so much time and frustration. For anyone dealing with these IRS notices about 1099-C issues, being able to actually talk to someone who can explain exactly what they're looking for is invaluable.

Don't forget that for Form 982, you need to be insolvent IMMEDIATELY BEFORE the cancellation of debt occurred. So if your 1099-C has a specific date, you need to prove insolvency for the day before that date. One thing that helped me was getting a free credit report from annualcreditreport.com (the official site) for that time period. You're entitled to one free report from each bureau every year, and they keep historical information. That gave me exact balances for all my debts at the right time. Also, be super thorough with your asset list - they'll look at everything including retirement accounts, cars, property, etc. Don't get caught missing something!

Has anyone actually calculated their insolvency using the worksheet in Publication 4681? I'm trying to do this now and I'm confused about what counts as an asset. Do I include things like furniture and clothing? What about my laptop and phone?

Great thread! I went through this exact situation about 18 months ago with a cancelled credit card debt. One thing I'd add that really helped me was creating a detailed timeline showing when each debt was incurred versus when the cancellation happened. For your student loans, definitely contact your servicer directly - they can usually provide a "payoff statement" or balance verification letter for any specific date going back several years. I found that student loan companies are actually pretty good about providing historical documentation since they deal with tax-related requests frequently. Also, don't forget to include ALL liabilities - not just the obvious ones like loans. If you had any unpaid medical bills, credit card balances, or even money owed to family members at the time, those count toward proving insolvency. I initially missed some smaller debts and had to revise my worksheet. One last tip: when you send your response to the IRS, include a cover letter that clearly explains what you're providing and references the specific notice number. This helps ensure your documentation gets properly matched to your case. Good luck!