Form 582 (Insolvency) and Credit Score

My client:

1. Filed no taxes for 12 years
2. Earned nothing during that time (he was caring for/living with a sick relative)
3. Received a 1099-C (Cancellation of Debt) for $35K in 2015
4. Was pretty much completely insolvent (had almost no assets) during this time
5. Had net operating losses on his consulting business for all 12 years.

I don't have a great deal of experience with NOLs, but I believe it's possible I might be able to carryforward enough NOL from 2008-2014 to cover the $35K in 2015. But then I'd have to prepare 6 years of returns for him, and that would be costly. It would be far easier just to file 2015 with a form 582, declaring my client's insolvency. My client is concerned, though, that a form 582 might somehow impact his credit score/might show up on his credit report.

Does anyone here know the credit score ramifications of filing a 582?

1. It's Form 982.
2. What kind of credit score does he think he has now with no income and the debt cancellation?

My client is concerned, though, that a form 582 might somehow impact his credit score/might show up on his credit report.

It’s not a 582, it’s a 982. And the IRS isn’t allowed to disclose confidential taxpayer information to unauthorized third parties. The discharge itself, though, way back in 2015, might have been reported to the credit reporting agencies. But that’s past history.

Why is this guy now, all of a sudden, worried about 2015? Is there some IRS matter pending? If not, then let sleeping dogs lie…

This guy has no credit anyway. Can a credit score go negative?

Thank you for your replies.

1. He is working/making tax payments now.
2. From my understanding, this $35K is considered income by the IRS, and they could go after him any time in the future.

If someone were to earn $35K in a year with a typical job, never submitted a return, and the IRS hadn't said anything for 5 years, I would still tell them to submit a return. Unless I'm missing something here, and the IRS views 1099-C income differently.

Regarding his net operating losses for 2008-2019, pardon my ignorance, but if he did decide to file for all 12 years, could he carryforward each loss for every year up until the present? I would guess that any loss accumulated prior to the discharge would be consumed/counted against the discharge before the insolvency is taken into account, correct?

Any unused NOLs can be carried forward for the applicable time periods.

Any unused NOLs can be carried forward for the applicable time periods.

Maybe you missed this part:

5. Had net operating losses on his consulting business for all 12 years.

You don’t have losses from consulting businesses. You have losses from hobbies, from stuff you play around with in your spare them when you’re otherwise occupied with caring for a sick relative…

And what about that – Did he get paid by sick relative for caring for sick relative?

Where did the funds come from, that he then spent, which lead to his consulting hobby losses?

Guess I did miss that part.

And what about that – Did he get paid by sick relative for caring for sick relative?

Where did the funds come from, that he then spent, which lead to his consulting hobby losses?

He didn't get paid anything from the sick relative. The losses were from previous savings.

I don't know the full extent of his pre-2008 consulting profits, but I believe he earned profits in a sufficient number of years to qualify as a business. Do 12 straight years of losses automatically convert his consulting to a hobby?

Twelve straight years of losses do not automatically make it a hobby. However, losses mostly come out of the business owner's pocket. Why would he keep the business open and keep incurring losses? So I wonder - does he even have losses?

and/or are the expenses creating these losses personal expenses?

Not carefully following this, but if you go the insolvency route then I think the non-taxable cancelled debt would reduce the NOL's if they are in fact legit.

Do 12 straight years of losses automatically convert his consulting to a hobby?

Yes, this is from Section 183.

(d)PRESUMPTION
If the gross income derived from an activity for 3 or more of the taxable years in the period of 5 consecutive taxable years which ends with the taxable year exceeds the deductions attributable to such activity (determined without regard to whether or not such activity is engaged in for profit), then, unless the Secretary establishes to the contrary, such activity shall be presumed for purposes of this chapter for such taxable year to be an activity engaged in for profit. In addition, common sense would dictate that if the taxpayer’s deductions from an activity exceed his gross income from such activity for 12 straight years, there is an insurmountable presumption that (1) the activity in question is a hobby and/or (2) the taxpayer is hiding gross income and/or (3) the taxpayer is fraudulently inflating deductions.

Do 12 straight years of losses automatically convert his consulting to a hobby?

Yes, this is from Section 183.

(d)PRESUMPTION
If the gross income derived from an activity for 3 or more of the taxable years in the period of 5 consecutive taxable years which ends with the taxable year exceeds the deductions attributable to such activity (determined without regard to whether or not such activity is engaged in for profit), then, unless the Secretary establishes to the contrary, such activity shall be presumed for purposes of this chapter for such taxable year to be an activity engaged in for profit.

I've seen this referenced elsewhere as relating to a business's first 5 years. If, say, a business turned a profit for 10 years, and then lost money for 3 straight, would that trigger the conversion to a hobby?

Chuck, most of us are thinking this guy's story doesn't hold water.

Something that I believe no one has yet touched on (per 26 U.S. Code § 172. Net operating loss deduction - emphasis mine):

(3)Election to waive carryback

Any taxpayer entitled to a carryback period under paragraph (1) may elect to relinquish the entire carryback period with respect to a net operating loss for any taxable year. Such election shall be made in such manner as may be prescribed by the Secretary, and shall be made by the due date (including extensions of time) for filing the taxpayer’s return for the taxable year of the net operating loss for which the election is to be in effect. Such election, once made for any taxable year, shall be irrevocable for such taxable year.

While I know that the rules pertaining to NOLs changed in tax year 2018, it would seem that the NOLs related to the prior tax years may not be carried forward without first being carried back. Quite a costly venture for a taxpayer with no income. You might want to get a retainer up front.

Also, I concur that the 12 years of losses is extremely suspect.

Also, I concur that the 12 years of losses is extremely suspect.

He's a friend (all my clients are either friends or relatives at this point), and is on the level. His mother had a fall, and he couldn't afford a round the clock nurse, so he had no choice but to move back home and take care of her. He wasn't expecting her to survive that long, but she did, and, while he was taking care of her, he wasn't actively running his business, but he was still trying to keep it afloat by continuing to pay for the website and for subscriptions. He wasn't pouring massive sums into this enterprise, but he was losing a little money every year- which would definitely come in handy now- if I could carry the NOLs back and then forward (however that is done- sorry, my knowledge of NOLs is minimal).

If I'm hearing you correctly, it sounds like the time I'd have to put in would outweigh the couple hundred dollars per year he'd be able to carry back/forward.

Thanks for your reply.

If I'm hearing you correctly, it sounds like the time I'd have to put in would outweigh the couple hundred dollars per year he'd be able to carry back/forward.

This is free from the AICPA. Good thru 2014. You know the later year changes.
https://www.aicpastore.com/Content/medi ... Losses.jsp

The friend relationship notwithstanding, I would charge multiple thousands of dollars for a project like this -- paid up front. If the amount of dollars that your friend will recover will be a few hundred, then I don't see how any of this would be feasible or worthwhile.

In a later post, you reference losses through 2019. If he used savings to pay the expenses for the years he had no income, would he have been insolvent in 2015? Maybe that's why you are questioning the NOL route?