To fill out an insolvency worksheet, taxpayers must have a list of all their debts and liabilities as well as the fair market value of all their assets, explains The Law Dictionary. This is the only way for them to prove that they are insolvent.
The Internal Revenue Service treats cancelled debt as ordinary income, which makes it taxable. To make this cancelled debt tax exempt, taxpayers must prove that they are insolvent, as the Internal Revenue Service explains. This means that the fair market value of their liabilities must exceed the fair market value of their assets, according to the Houston Chronicles.
The insolvency worksheet lists the liabilities by type and the assets by type, states the Houston Chronicle. Taxpayers or companies must list the fair market value of their assets and liabilities on the day before the debt was cancelled.
In part one of the form, taxpayers must list all of their liabilities, according to The Law Dictionary. This includes cancelled debts and debts that were not forgiven.
In part two of the insolvency worksheet, taxpayers must list all of their assets, explains The Law Dictionary. In the assets section, taxpayers must include the real market value of any real estate or property that they own. They should also include their bank account balance, their 401(k) and other retirement accounts. This helps determine the person's financial situation at the particular time.