Pursuant to the IRS, a debt exists if you borrow money and are obligated to pay back a determinable amount in the future. There are situations where debts are deemed cancelled for tax purposes, however, it should not be assumed that a 1099-C results in the borrower being relieved of their obligation to repay.
What to do if you receive a 1099-C
Don't panic! Provide the form to your certified public accountant or tax preparer. If you prepare your own taxes, the cancelled taxes should be reported as part of the tax return (Form 1040 or 1040NR) for the year it was received. However, you should review the form to ensure the information is accurate. For example, if the debt discharge amount is erroneous, you should contact the creditor to obtain a corrected 1099-c.
Why did I receive a 1099-C debt cancellation?
To understand why a debt was cancelled, refer to Box 6 of the 1099-C form and pay close attention to the Identifiable Event Code. To understand the different classifications, read the third page of IRS Publication 4681.
Examples of when Debt Cancellation may arise:
- If the creditors collection efforts have failed to recover the debt.
- Student loan forgiveness
- If a property is foreclosed, repossessed, or abandoned
- As part of a mortgage modification or short-sale transaction
- Settling debt for less than the full balance
When a settlement results in a reduction of debt of $600 or more, the creditor may file a 1099-c with the IRS to inform them of the amount of debt that was cancelled.
Do I need to pay income taxes on cancelled debt?
Maybe. Some types of cancelled debt are exempt. For example, debt discharged in bankruptcy is not considered taxable income. Same goes with certain types of student loan forgiveness. However, even in situations where the debt cancellation is counted towards income, if the borrower is deemed insolvent per IRS guidelines, the tax liability might be avoided. It is important to have your situation reviewed by an accountant to understand your potential liabilities with respect to cancellation of a particular debt.
Can collectors call to collect a cancelled debt?
Yes. Receiving a 1099-C does not necessarily mean that your obligation has been terminated. In most situations, the debt included in a 1099-C can still be collectable. Only a bankruptcy discharge would remove the borrowers liability while cancelling the debt.
The debt cancellation that results from a 1099-C is specifically for tax purposes. A creditor can file a 1099-C and still attempt collections, sell the debt, assign the debt to collectors, or even bring a lawsuit (within the applicable statute of limitations). The best way of determining whether your obligation on the debt was actually cancelled is to ask the creditor.
Helpful tip! If you repay any amount of a debt after the 1099-C cancellation, you might be able to file a request for a refund from the IRS for the amount of tax you overpaid. Visit this IRS website to learn more about the debt cancellation and it's tax implications.
Do you want to resolve your debts? Learn how our team of debt lawyers at the Law Office of Simon Goldenberg, PLLC can help. Call 888.301.0584 today to request your free initial evaluation.
This page is for general informational purposes only and does not include tax or legal advice. Our law firm does not provide any assistance with taxes. For tax help, contact a certified professional accountant. For help with debt relief, forgiveness, and cancellation, call us.