student loan discharge and insolvency

[resolution]

A friend of mine had her student loans discharged due to total disability. She and her husband had filed for chapter 13 bankruptcy for medical debt about four years ago and have one more year of bankruptcy payments before it is complete. They are concerned about the tax implications of the loan discharge.

I recommended that they talk to their bankruptcy attorney to see if he could recommend a tax guy that could look into potential insolvency to reduce the tax owed on the student loan discharge. However they like to go to one of those chains like Liberty Taxes and get their taxes done. Is this something that can be handled by one of the chains without being messed up or do they need to pay extra to get an enrolled agent or cpa to do their taxes?

[zibazinski]

I didn't know you could get student loans discharged.

[Deleted]

I think total disability is the only way.

[resolution]

She would much rather be healthy and be able to pay them, but this is just how things turned out.

[taxref]

I would recommend she avoid a storefront tax prep firm, and instead see a CPA or EA.  When circumstances get beyond basic tax returns (wages and itemized deductions), it becomes hit or miss as to whether one will find a person with enough knowledge and/or experience at a storefront firm.  Her chances of getting a qualified person are better going the CPA/EA route.

I'd also add that my answer is not intended as a slam to everyone at storefront firms.  Over the years, I've met some truly good preparers who work at storefront firms.  I've also met some CPAs who had no business being anywhere near a tax return.  As I mentioned, though, her chances of getting a qualified person for these circumstances are better going the CPA/EA route.

[resolution]

Thanks for the response. I will pass on that information. I had suspected it would be the case but wasn't sure if I was being overly paranoid.

[TheOtherMe]

BIL works at Block and is an EA.  However, that is rare.  

[rangerj]

Look at section 108 of the tax code and 1.108 of the Treasury Regulations regarding discharge of indebtedness income. The amount of debt discharged in bankruptcy is excluded from taxable income. Section 108 also excludes discharged debt to the extent the taxpayer is "insolvent" as defined in section 108. As per the above I would see a tax professional such a an Enrolled Agent or CPA who has experience with "discharge of debt" tax issues. As for storefront tax preparation places they are usually franchise operations and ANYONE can buy a franchise without any tax knowledge or experience, or any other qualifications. One such franchise offers its hires a 10 week tax course and pronounces the students who finish the course as tax experts. This is not an indictment of the entire industry, but it is an industry that needs far more regulation.

[TheOtherMe]

Feb 1, 2015 19:37:54 GMT -5 rangerj said:

One such franchise offers its hires a 10 week tax course and pronounces the students who finish the course as tax experts. This is not an indictment of the entire industry, but it is an industry that needs far more regulation.

My BIL has worked for Block for over 20 years.  He is an Enrolled Agent and he has prepared all types of returns.  The past couple of year's he has a difficult tax return in his own family.  His son married a woman from Ukraine, which made their taxes very complicated.  Under her visa, she could work at the school she was attending but no where else.  Then she got a one year work visa, so could work.  Now she has a green card, so their tax return will be easier.

I have a friend who is a retired IRS agent, like me, and gets bored in winter.  She works for Jackson Hewitt.  She likes to find problems in their program and report them to headquarters.

I took the Block course about 10 years ago.  You do have to pass the final to get hired.  Then you had to go through an interview.  Everybody did not get hired.  The first contract only went through peak.  Over half of the first year preparers were not offered a contract past that time.  I did get the offer to stay through April 15.  I was in a busy office, which helps in making you appear productive.  People in small, slow offices were the ones that were let go.

I do recommend rangerj's recommendation on seeing a qualified preparer.  They can be found at Block of Hewitt.  Call around and find out the qualifications.

I can tell you, that in my experience, Block, etc. are not necessarily cheaper.