A 1099-C form is a tax form that you may receive if you’ve had cancellation of debt or forgiven debt. However, sometimes a creditor or debt collection company may still try to collect on a debt on which you received the form.
If you believe this is happening to you, here are potential tax consequences you may need to know.
What is IRS Form 1099-C?
If you’vesettled a debtfor less than what you owe, you’ll likely receive a 1099-C form in the mail during tax season. Lenders must issue one if the amount of canceled debt is $600 or more.
Some cases where lenders may issue a 1099-C include but are not limited to:
- Foreclosure or short sale of your property
- Credit card debt settlement or forgiveness
- Filing for bankruptcy
- Other instances of debt cancellation
When you receive this form, you must include it on your income tax return for the tax year and pay income tax. That forgiven balance will often be added to your gross income.
Exceptions, where you may not be taxed, include:
- The forgiveness is a gift from a friend or family member
- You’re insolvent
- The discharge was a result of bankruptcy
- You received the cancelation under a certain student loan debt forgiveness program
- It’s related to farm indebtedness or business-related real estate debt
In any case, it’s a good idea to hire a CPA or tax professional who can help you determine your tax liability.
This depends on how the debt was “forgiven.” For example, if you made a settlement with your credit card company, that means you made a deal with them to pay a percentage of what you owed. Depending on the agreement, that can be in a lump sum or installment payments.
In this case, the 1099-C you received will show the remainder of the balance you didn’t pay. You will not have to pay this back, but you may have to claim it as taxable income to the Internal Revenue Service (IRS).
However, in 2016, an IRS rule allowed debt collectors to file a 1099-C after 36 months of no payment. In this event, the account is still delinquent, but the debt hasn’t been forgiven, so the lender may still try to collect.
The IRS amended the rule later that year, so creditors are no longer expected to file a 1099-C just because it’s 36 months past due. But it is possible for it to still happen.
How to respond to a 1099-C?
If you settle a debt with a lender or collection agency, you can expect to receive a 1099-C. Make sure you receive confirmation of the settlement payment and forgiveness. That way, you can match it up with the information on the tax form.
If you’ve received a 1099-C on a debt you didn’t know what canceled, contact the creditor or debt collection agency immediately. You can verify whether the debt has been canceled and whether you need to take additional steps to ensure it’s legitimate. Be sure to check on the statute of limitations around your debt and speak with an account or tax preparer regarding old debt.
Also, ensure the debt hasn’t been charged off and sent to another collection agency. If that is true and the letter was sent in error, you no longer have to pay the debt, but you may have to claim the entire balance owed as income.
Finally, if you’ve received a 1099-C and the lender is still trying to collect, contact them to understand the situation. If the creditor is working under the old rule on a debt that’s 36 months old, you can request that they rescind the 1099-C. Otherwise, you may owe taxes on a balance that was never forgiven.
If the creditor doesn’t rescind the tax form, you canfile a dispute with the IRS.
The bottom line
Getting a 1099-C in the mail may be surprising. That’s especially the case if the creditor is still trying to collect on the debt listed on the tax form. If you get the form, contact the creditor to make sure it’s canceled. If not, you may need to work with the creditor or the IRS to make sure you’re not taxed on a debt you still owe.
FAQs
If you are able to get your debt completely canceled, you then no longer have any responsibility for the amount owed. But the creditor must report the canceled amount or settled debt to the IRS using the Form 1099-C cancellation of debt.
How badly does a 1099-C affect my taxes? ›
Unfortunately, your next challenge might be a huge tax bill. In most situations, if you receive a Form 1099-C from a lender, you'll have to report the amount of cancelled debt on your tax return as taxable income. Certain exceptions do apply.
Can a creditor still collect after issuing a 1099-C? ›
If a creditor continues to attempt to collect the debt after you receive a 1099-C, the debt may not have been canceled and you may not have income from a canceled debt. Verify your specific situation with the creditor.
Do you have to pay back 1099-C? ›
You will not have to pay this back, but you may have to claim it as taxable income to the Internal Revenue Service (IRS).
Does cancellation of debt affect your tax return? ›
Generally, if you borrow money from a commercial lender and the lender later cancels or forgives the debt, you may have to include the cancelled amount in income for tax purposes. The lender is usually required to report the amount of the canceled debt to you and the IRS on a Form 1099-C, Cancellation of Debt.
How much tax will I pay on a 1099-C? ›
That depends on your overall taxable income. Your income, including amounts listed on your 1099-Cs, gets taxed at the normal progressive rate, which ranges from 10% to 37%. How much tax you will owe depends on your tax bracket, filing status, credits, and deductions.
What is the 36 month rule for 1099-C? ›
Thus, the failure of the debtor to make a payment for 36 months generally requires the creditor to file and furnish a Form 1099-C, even if the creditor has not ceased collection activities and discharged the debt.
How to avoid paying taxes on debt settlement? ›
As noted above, proving yourself to be insolvent or filing for bankruptcy are two strategies that can minimize your tax liability from a debt settlement.
Do I have to pay taxes on charged off debt? ›
If you settle a debt with a creditor for less than the full amount, or a creditor writes off a debt you owe, you might owe money to the IRS. The IRS treats the forgiven debt as income, and you could owe federal income taxes.
What is the statute of limitations on a 1099-C cancellation of debt? ›
There's no specific statute of limitations for canceled debt, but IRS rules require creditors to file a 1099-C the year following the calendar year in which a qualifying event occurs.
Send a simple letter to the IRS with a completed IRS form 982. he form is located at the IRS' website here: https://www.irs.gov/pub/irs-pdf/f982.pdf In the letter you will include a Statement of Assets and Liabilities, which can be handwritten on a piece of notebook paper if necessary.
Is there a way to settle with the IRS? ›
How an offer in compromise works. This is an agreement between a taxpayer and the IRS that settles a tax debt for less than the full amount owed. The goal is a compromise that's in the best interest of both the taxpayer and the agency. The offer in compromise application includes a fee of $205 and an initial payment.
What is an identifiable event for 1099-C? ›
An “identifiable event” generally triggering a Form 1099-C reporting obligation includes: (1) a bankruptcy discharge; (2) a cancellation/extinguishment that renders a debt unenforceable in a receivership, foreclosure, or similar proceeding; (3) a cancellation upon the expiration of the statute of limitations for ...
Does a 1099-C affect your credit? ›
The event that triggered the 1099-C — unpaid credit card debt, for example, or a foreclosure or short sale of your home, a vehicle repossession or other incident in which you did not pay a debt — almost certainly has been reported on your credit reports. In some sense, then, the damage has already been done.
Where do I put 1099-C on my tax return? ›
Lenders or creditors are required to issue Form 1099-C, Cancellation of Debt, if they cancel a debt owed to them of $600 or more. Generally, an individual taxpayer must include all canceled amounts (even if less than $600) on the "Other Income" line of Form 1040.
What kind of debt can be taken from tax refund? ›
There are only four types of debt for which the federal government will withhold your tax refund or send it to one of your creditors. These debts include past-due federal taxes, state income taxes, child support payments and amounts you owe to other federal agencies, such as federal student loans you fail to pay.
How bad does a 1099 affect my taxes? ›
1099 contractors pay the full 15.3% from the money they earn. They also need to file quarterly estimated tax payments and pay quarterly estimated federal and state taxes.
What is the threshold for a 1099-C? ›
An agency is required to file a 1099-C following an “identifiable event”. There is a dollar amount threshold. The filing of a 1099-C is mandatory for debts over $600, but an agency may report lesser amounts. For lending transactions the dollar amount refers only to principal.
How does debt settlement affect your taxes? ›
Settled debt is taxed as ordinary income. The amount you'll pay is based on your tax bracket and marginal tax rate. Say you earn $75,000 a year as a single taxpayer. Your top marginal tax rate is 22%, so any additional income from a settled debt will be taxed at 22%.
Does being an independent contractor affect taxes? ›
Independent contractors in California are subject to a 15.3% tax, 12.4% for Social Security and 2.9% for Medicare. And since you are considered to be both the employer and employee by the IRS, this makes you responsible for paying the total tax amount, plus estimated taxes.
