You should seek advice as to how this affects your taxes. Nothing in this email is meant to be tax advice.

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.

You can review the IRS Website concerning 1099-C.

What should a consumer do when 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.

See: Instructions for Form 982

Failure to address this 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.

Does this mean that I do not owe the creditor?

No. You still owe the creditor. The charge off is an "accounting maneuver" that gets the debt off the creditor's books. But you still owe the debt. They may choose and often do to discontinue debt collection against you. In extreme cases, creditors may even refuse to accept money from you to settle the debt once they have issued the 1099-C.

Should the creditor remove this account from my credit report?

We do not believe that they are required to remove the account from your credit report. It should fall off your credit report 7 1/2 years from the Date of First Date of FCRA delinquency.

Should the creditor -0- out the account on my credit report?

This is up for debate. If you experience this issue - please contact us.

NOTHING IN THIS ARTICLE IS TO BE MEANT TO BE TAX ADVICE. YOU SHOULD SEEK THE ASSISTANCE OF A CPA OR OTHER KNOWLEDGEABLE TAX PROFESSIONAL.

For more information about our services please go to https://texascreditlaw.com