Not many know what a 1099-C is or why they receive it. But these forms can be a little scary because they’re tax documents—and no one wants to mess up their taxes. When you get one, it’s because you had a portion or all of a debt canceled.
It’s important to understand what a 1099-C is and what to do about it to ensure you are filing your taxes correctly. Here’s what you need to know.
What’s a 1099-C?
A 1099-C falls under the 1099 tax form series of information returns for the Internal Revenue Service (IRS). These forms let the IRS know you’ve received income outside of your W-2 income. Any company that pays an individual $600 or more in a year is required to send the recipient a 1099. You often receive a 1099-C when $600 or more of your debt is forgiven or discharged.
When you use credit or take out a loan, that borrowed money is still currency you can use—even if you don’t pay it back. So when debt is canceled, that money is considered ordinary income and is therefore taxable (if over $600), which means you have to report it on your tax return. Yep, Uncle Sam gets a cut of the portion of your debt that was forgiven or discharged.
When you get a 1099-C, you can find the reason you received it in the sixth box of the form. Some common reasons you may get a 1099-C are included below:
- You negotiated a settlement to pay a debt for less than the amount you owed and the creditor forgave the rest.
- You owned a home that went into foreclosure and there was a forgiven deficiency (a difference between the home’s value and what you owe on it).
- You sold a home in a short sale where the lender agreed to accept less than the full amount you owe.
- You didn’t pay anything on a debt for at least three years and there has been no collection activity in the past year.
Are My Debts Erased with a 1099-C?
If you know you received a 1099-C because of a settlement agreement, where you paid off debt for less than the full amount due, then you don’t owe anything. If the form was filed because you haven’t made payments for three years and they haven’t tried to collect recently, then you may still owe the debt. Your state’s statute of limitations may determine what debt you are and are not responsible for.
Anytime you receive a 1099-C, check the form for errors. If you find any, first work with your creditor to get the information corrected. If that doesn’t resolve the issue, then you can include an explanation with your tax return. To find out if a 1099-C has been filed, you can request a wage and income transcript from the IRS for the tax year or years in question. The transcript should list any 1099-Cs that were filed under your Social Security number.
Do I Have to Pay Taxes on the 1099-C Amount?
The IRS will automatically assume that the amount listed on the 1099-C is accurate and will expect you to include that amount in your ordinary income when you file your tax return. Depending on the other income you earn and your tax bracket, you could receive a larger tax bill or a smaller refund. However, if you can demonstrate that you qualify for an exclusion or exception, you may be able to avoid paying taxes on part or all of that phantom income.
One of the most commonly used exclusions is the insolvency exclusion. It works like this: you are insolvent to the extent that your liabilities (what you owe) exceed your assets (what you own). If the total amount by which you are insolvent is larger than the amount listed on the 1099-C, you can exclude the entire amount listed on the 1099-C from your income. You’ll have to file Form 982 with your tax return to claim this exclusion.
If the amount by which you are insolvent is less than the amount on the 1099-C, then you may be able to avoid including part of that amount in your income. However, the insolvency exclusion may not be the perfect fit for everyone—there may be another exclusion that fits your situation better.
What if I Don’t Receive a 1099-C for Canceled Debt?
Even if you don’t receive a 1099-C, you are still responsible for reporting canceled debt as taxable income. Make sure you do not leave any forgiven or discharged debt off of your tax return. If you do, you will more than likely hear from the IRS in the future for failure to pay, which will cost you more money in the long run. Look at your credit report to ensure you don’t have any unpaid debt from the last three years.
What if I Receive a 1099-C for Old Debt?
Be careful when it comes to old debt and 1099-Cs. Creditors who follow IRS guidelines should send out 1099-Cs when a debt lies dormant for three years and there has been no significant collection activity for the past year.
Specifically, the IRS 1099 instructions state that debt is canceled “when the creditor has not received a payment on the debt during the testing period. The testing period is a 36-month period ending on December 31.”
However, the creditor can rebut this cancelation if “the creditor (or a third party collection agency on behalf of the creditor) has engaged in significant bona fide collection activity during the 12-month period ending on December 31.”
If a creditor sends out 1099-Cs years (or decades) after the 1099 deadlines, the responsibility falls upon the taxpayer to explain to the IRS why they believe it should not have been filed that year. Again, there is no specific form for reporting this kind of dispute. You’ll have to include an explanation, and you may wind up arguing with the IRS to get it resolved.
What if I Receive a 1099-C for Debts Canceled in Bankruptcy?
You don’t have to pay taxes on personal debts discharged in bankruptcy. And creditors aren’t required to file 1099-Cs for those debts. If they do, however, you can file Form 982 and claim an exclusion because the debt was included in bankruptcy.
Don’t panic if your bankruptcy occurred long ago and you don’t know where to find a copy of your bankruptcy papers to prove the debt was discharged. Although it’s anyone’s guess why a creditor would send an unrequired 1099-C years after the fact, you likely won’t have to jump through hoops to prove the debt was discharged.
Getting a 1099-C can be confusing, especially if you don’t have a handle on your credit. Avoid future credit surprises by using Credit.com’s free credit report tool.
Image: David Sacks
