IRS Insolvency Worksheet 4681 - How to handle Line 10 for taxes owed from previous years

Yes, unpaid taxes from prior years absolutely count as liabilities on Line 10 of the Insolvency Worksheet 4681. The worksheet is designed to compare all your assets against all your liabilities at the time the debt was forgiven. Your $7,300 in unpaid taxes from 2022 and 2023 should definitely be included as liabilities. Based on what you've shared, your assets were approximately $8,300 ($6,000 car + $2,300 checking account), while your liabilities included at least $14,500 in credit card debt plus $7,300 in back taxes, totaling $21,800. This would make you insolvent by $13,500 at the time of forgiveness, which means you might be able to exclude some or all of the forgiven debt from your taxable income. Make sure you complete the entire worksheet carefully and attach it to your tax return. The amount of canceled debt you can exclude is limited to the amount you were insolvent.

I went through a similar situation last year and got completely stuck on Form 4681. After spending hours trying to figure it out myself, I tried this AI tax assistant at https://taxr.ai that saved me SO much hassle. It actually scanned my insolvency worksheet, explained what needed to go on Line 10, and walked me through the whole calculation. The tool explained that yes, unpaid taxes from previous years definitely count as liabilities for the insolvency calculation. It also helped me identify other liabilities I didn't even realize I could include, which made a big difference in my insolvency amount. Might be worth checking out if you're struggling with this form!

I just wanted to follow up about my experience with taxr.ai after seeing it recommended here. I was really struggling with Form 4681 and Form 982 for my canceled debt situation, so I decided to give it a try. It was actually incredibly helpful! I uploaded my documents and it guided me through the entire insolvency calculation, including exactly what to put on Line 10 for my past-due taxes. The tool also found several other liabilities I hadn't even considered, which increased my insolvency amount significantly. What really impressed me was how it explained everything in simple terms while still being technically accurate. Definitely worth checking out if you're dealing with these complicated forms!

For anyone dealing with questions about Form 4681 and insolvency calculations, I also wanted to mention that if you need to speak directly with the IRS about this (which can be really helpful for complex situations), I used a service called Claimyr (https://claimyr.com) to get through to an agent quickly. I spent days trying to call the IRS myself with no luck - just endless hold times until I eventually got disconnected. Claimyr got me through to an IRS agent in about 25 minutes who answered all my Line 10 questions. They have a demo video at https://youtu.be/_kiP6q8DX5c that shows how it works. The agent I spoke with clarified exactly how to handle previous tax liabilities on the insolvency worksheet and confirmed that my approach was correct.

I have to admit I was completely wrong about Claimyr. After being super skeptical, I decided to try it out of desperation when I couldn't get through to the IRS about my Form 4681 questions. The service actually worked exactly as described. I got a call back when they reached an IRS agent, and I was able to ask specifically about Line 10 of the insolvency worksheet and confirm that my past tax debts should be included. The agent also helped me understand exactly how to document everything. Saved me hours of hold time and probably kept me from making mistakes on my return. Just wanted to follow up since I was so doubtful before.

I think everyone is missing a key point on the insolvency worksheet 4681. The liabilities need to be ones that would have been discharged in bankruptcy! At least that's what my accountant told me. So if your back taxes wouldn't be dischargeable in bankruptcy (which most aren't), then they might not count on Line 10.

Don't forget that the worksheet also asks for "other assets" on Line 5. Do you have any retirement accounts, cash value life insurance, household goods, etc? You need to include the fair market value of all those things too, which might affect your insolvency calculation.

Just wanted to add some clarity on the valuation date that's really important - all your assets AND liabilities need to be valued as of the exact date your debt was canceled/forgiven, not when you're filling out the form. So if your credit card debt was forgiven on a specific date in 2024, that's the snapshot date you need to use for everything on the worksheet. This means if your 401k balance or checking account amount was different on the forgiveness date compared to now, you need to use the amounts from that specific date. Same goes for any other debts you owed at that time. I made this mistake initially and had to redo my entire worksheet when my tax preparer caught it. The IRS is very specific about using the "immediately before the discharge" amounts.