What to Do If You Get a 1099-C for an Old Debt

Earlier this year, questions poured in from readers grappling with how to deal with 1099-Cs they received from lenders reporting “canceled” or “forgiven” debt. I wrote a number of stories addressing the issues they raised, and vowed not to touch the topic again until next tax season.

But the questions kept coming in.

One kept nagging at me: What should you do if you get a 1099-C for a very old debt? Though I had written one story already on that subject, the fact that I couldn’t provide readers with a clearer solution bothered me.

Take Dave, for example. He told us that in 1997 he was in an auto accident. He was out of work for eight months and could not pay his auto loan. The vehicle was repossessed and the $15,000 balance was charged off. The loan was with Chevy Chase Bank. In 2006 – almost 9 years later – he heard from a debt collector but he ignored it. The debt was off his credit reports by that time. Capital One had acquired Chevy Chase bank in 2008, but didn’t try to collect from him. In 2011, he received a 1099-C from Capital One reporting $9,000 in canceled debt for tax year 2010 – about 13 years after he stopped paying on the loan. Now he may have to pay an additional $2,000 in taxes for 2010 as a result.

If Dave’s story was the only one that I had heard, I would think it was an anomaly, but a number of taxpayers have complained about receiving 1099-Cs for very old debts.

As luck would have it, I was invited to speak at a local meeting for financial planners and CPAs. The speaker that preceded me was Jo Ann Koontz, a CPA and attorney who explained in detail some of the challenges taxpayers are facing when it comes to dealing with 1099-Cs. She was a wealth of information on this topic.

So I decided to break my vow and write one more piece this year.

One of the biggest problems with these forms, Koontz explained, is that it isn’t always clear when a debt was forgiven. Creditors are required to issue a 1099-C for the tax year in which an identifiable event took place. That could include a creditor agreeing to settle a debt for less than the full balance, or foreclosing on a home in a non-recourse state where the lender cannot try to collect a deficiency.

But what about when someone, like Dave, just stops paying a debt? In many states, lenders have several years to try to collect. So when is the 1099-C supposed to be sent out?

Koontz explained that in those situations, what the IRS is looking for is the “expiration of a non-payment testing period.”

“The testing period is the 36-month period (not including a bankruptcy stay, if one applies) ending at the close of the year when there hasn’t been any payment or the creditor hasn’t engaged in any significant collection activity,” she says.

She also pointed to the IRS instructions for 1099-C forms:

Significant bona fide collection activity does not include nominal or ministerial collection action, such as an automated mailing. Facts and circumstances indicating that a debt was not canceled include the existence of a lien relating to the debt (up to the value of the security) or the sale or packaging for sale of the debt by the creditor.

So here’s my unofficial, plain English understanding of this. If the creditor hasn’t done anything to collect for 36 months, they need to send the taxpayer a 1099-C the following year. And my layman’s understanding of Dave’s situation is that, in Dave’s case, the lender waited too long to send him a 1099-C.

What’s a Taxpayer to Do?

Most people writing to me assume there is a form you can file with your tax return to let the IRS know that the 1099-C you received is incorrect. There’s not.

In an article about dealing with 1099-C forms on GetOutofDebt.org, CPA Jim Buttonow suggests taxpayers who get an incorrect 1099-C form initiate a dispute by calling the IRS at and asking them to “initiate a Form 1099 complaint. The IRS will fill out form 4598, ‘Form W-2, 1098, or 1099 Not Received, Incorrect or Lost’.” According to the article, the creditor that issued the inaccurate 1099-C will be notified by the IRS of the dispute and asked to correct the form within 10 days. “The taxpayer will be sent a letter and a copy of the form that they can attach to their tax return in the event a corrected 1099-C is not received in time.”

When I asked Koontz about Form 4598, she could not find any recent references to it and believes it was proposed but not adopted. So it may be worth a try, but until we hear from taxpayers who have successfully used it, don’t count on it.

So what should you do? Koontz recommends the taxpayer include the amount reported on the 1099-C form on his or her tax return, then back it out and attach an explanation of why it is wrong. (Form 982 is the form you use when you believe you qualify for an exception or exclusion, but it’s not the form you use if you disagree with the filing of a 1099-C.) It’s a good idea to work with a tax professional to make sure you are handling it correctly.

She warns that the IRS will likely assume the 1099-C is correct and the taxpayer may get a notice of deficiency saying they owe money to the IRS. But that’s not necessarily a bad thing. Why? Because at that point you’ll be dealing with a more knowledgeable IRS employee than if you just try calling the toll-free number listed on the IRS website. “You’ll get someone at a higher pay grade,” she says.

She also shared a recent Tax Court case can that can be helpful in situations like this one. In Stewart v. IRS (2012), Stewart defaulted on a credit card debt owed to MBNA somewhere between 1994 and 1996. The debt was sold to two collection agencies. Stewart did not make any payments and sent the last collection agency, Portfolio Recovery Associates, a cease contact letter instructing them not to contact him again. At that point, PRA filed a 1099-C in the amount of $8,570.71 for the tax year 2008. The court determined that there was no cancellation of debt in 2008.

Raising a Ruckus

Most of the taxpayers who have complained about this type of problem are outraged, and they want to know whether they can “turn in the lender” for not following the rules. Dave wrote:

I don’t pretend to know anything about accounting practices for a large company like that but there has to be laws about what they can and can’t do. And aren’t these 1099c’s with doctored dates an outright lie to the IRS?

While there are “whistleblower groups within the IRS for those who didn’t issue 1099-Cs,” says Koontz, it’s hard to identify a way to complain about a lender issuing a 1099-C – even if it is too late.

Call me cynical, but would the IRS pass up an opportunity to collect more tax, even if the lender is sending the 1099-C form years too late?

She also told me the Taxpayer Advocate’s office is not the correct place to complain about this practice. Although the National Taxpayer Advocate Nina E. Olson has identified these forms as one of the most significant problems facing taxpayers, her office is really designed to make sure that taxpayers get answers to their questions.

And as for suing the lender, Koontz said there may be some class action lawsuits targeting certain lenders, but because this is an emerging issue, potential members of the class may not have yet been identified. If you know of such a lawsuit, feel free to mention it in the comments section below.

Finally, if you’re worried about how your debt or other issues could be impacting your credit, you can check your credit each month using Credit.com’s free Credit Report Card. This completely free tool will break down your credit score into sections and give you a grade for each. You’ll see, for example, how your payment history, debt and other factors affect your score, and you’ll get recommendations for steps you may want to consider to address problems. In addition, you’ll also find credit offers from lenders who may be willing to offer you credit. Checking your own credit reports and scores does not affect your credit score in any way.

Learn More (Podcast): Listen to an interview with attorney Jo Ann Koontz, CPA on Talk Credit Radio where she discusses 1099-C’s related to short sales and foreclosures. Download the interview here (right click and choose “save as”); listen online; or listen on iTunes.

Image: 401k, via Flickr