Cancellation of Debt Income IRS Form 1099-C
What is Form 1099-C?
When a debt more than $600 is forgiven or written off by a creditor, the creditor sends the IRS a 1099-C which notifies the IRS that a debt was cancelled. The IRS views this cancelled debt as taxable income. In other words, the IRS doesn’t see the cancelled debt as completely forgotten, but rather as free money from the creditor, thus taxable income.
Loan modifications, repossessions, foreclosures, short sales, credit card settlements and similar debt restructuring events all trigger cancelled debt income and the accompanying IRS Form 1099-C.
Exclusions and Exceptions
It is possible that you may not need to pay the income tax on your cancelled debt if you qualify for one of the exclusions or exceptions. An example of one exception is if you can prove that you were insolvent at the time of receiving the 1099-C. If you can prove insolvency at the time of debt cancellation, you will not be required to pay the income tax.
Even if you qualify to exclude canceled debt income, you will need to file certain documentation with your tax return to claim the exclusion. IRS Form 1099-C can trigger an audit of your tax return without preparing the proper forms and disclosures needed for debt cancellation. Contact us to verify your situation more fully to see if you qualify for any exclusions or exceptions.
If you Disagree with the Amount of Cancelled Debt Reported on 1099-C
If you disagree with the amount that the creditor stated on the 1099-C and reported to the IRS, you need to contact the creditor and confirm whether or not that information is correct. If the amount of cancelled debt is incorrect, you need to request the 1099-C to be amended since this will change your tax liability.
I Can’t Pay the Taxable Income I Owe on Form 1099-C
If you cannot afford to pay what you owe, but are not insolvent, the IRS offers several tax payment options like installment plans and Offers in Compromise.
Get a Professional Opinion
It may be necessary for you to receive a professional opinion or representation before the IRS when dealing with Form 1099-C. Contact us today if you have any further questions or are in need of representation