Many consumers receive a 1099-C from a creditor when they settle a debt or they have received a 1099-C from a debt collector without paying off the debt.

What is a 1099-C?

It is a form filed by the creditor telling the IRS that the debtor has canceled over $600.00 in debt obligation. The IRS views this “canceled” debt as income unless (a) there is a bona fide dispute concerning the debtor’s obligation to pay, (b) the debtor is insolvent, (c) the debt is discharged in bankruptcy. (See 26 U.S.C. §6050P; 26 C.F.R. §1.6050P)

Common Issues with the 1099-C

Many of the creditors falsely report how much is owed to the IRS. They can only report the principal amount as “canceled” debt. They can not include interest and penalties. (See Debt Buyers’ Ass’n v. Snow, 06-101, 2006 U.S.Dist. LEXIS 6527 (D.D.C., Jan. 30, 2006)) Most debt collectors buy information about a debt off a disk without knowing the true nature of the debt. The amount of debt a collector is collecting usually includes principal + interest + penalties + collection fees. Most of the time there is no way of knowing what the principal amount written off was.

Other requirements of the IRS code are that generally, a debt is not canceled if (a) collection activity has occurred within 36 months (b) the debt is packaged for sale.

What should a consumer do when a they receive a 1099-C?

First, they will need to evaluate the amount of debt being “canceled.” If the “canceled” amount: a) does not reflect close to what the credit card limit was b) if they have a bona fide dispute with the debt OR c) have discharged the debt in bankruptcy then they will want to file a claim with the IRS. To file a claim you will want to fill out and mail form 3949-A

Second, if the consumer is insolvent, (meaning they have more liabilities than assets) then they need to explain that to the IRS on your tax return. You can fill out IRS Form 982: Reduction of Tax Attributes Due to Discharge of Indebtedness and attach a detailed letter to your tax return explaining the calculation of your total debts and assets. Your liability or lack thereof depends on your equity in assets.

Failure to address this via the 982 may result in an IRS “under-reporter” assessment. They will tax you on the 1099C if you leave it off the return when all tax documents reported to them are matched against the data on your return.

IRS Instructions for 1099-C

IRS Code for the 1099-C

26 U.S.C. §6050P; 26 C.F.R. §1.6050P says:

(a)(1) Before discharging a delinquent debt, also referred to as close out of the debt, the Secretary shall take all appropriate steps to collect the debt in accordance with 31 U.S.C. 3711(g)(9), and parts 30 through 33 of this chapter, including, as applicable, administrative offset; tax refund offset; Federal salary offset; credit bureau reporting; administrative wage garnishment; litigation; foreclosure; and referral to Treasury, Treasury-designated debt collection centers, or private collection contractors.

(2) Discharge of indebtedness is distinct from termination or suspension of collection activity under this subpart, and is governed by the Internal Revenue Code. When collection action on a debt is suspended or terminated, the debt remains delinquent and further collection action may be pursued at a later date in accordance with the standards set forth in this part and 31 CFR parts 900 through 904.

(3) When the Department discharges a debt in full or in part, further collection action is prohibited. Therefore, before discharging a debt, the Secretary must:

   (i) Make the determination that collection action is no longer warranted; and

   (ii) Terminate debt collection action.

(b) In accordance with 31 U.S.C. 3711(i), the Secretary shall use competitive procedures to sell a delinquent debt upon termination of collection action if the Secretary of the Treasury determines such a sale is in the best interests of the United States. Since the discharge of a debt precludes any further collection action, including the sale of a delinquent debt, the Secretary may not discharge a debt until the requirements of 31 U.S.C. 3711(i) have been meet.

(c) Upon discharge of an indebtedness, the Secretary must report the discharge to the IRS in accordance with the requirements of 26 U.S.C. 6050P and 26 CFR 1.6050P–1. The Secretary may request that Treasury or Treasury-designated debt collection centers file such a discharge report to the IRS on the Department’s behalf.

(d) When discharging a debt, the Secretary must request that litigation counsel release any liens of record securing the debt.