1099c question

Here's the link to IRS Pub 525 which covers 1099:

http://www.irs.gov/pub/irs-pdf/p525.pdf

I've seen that publication, but it really doesn't provide much guidance.

The 1099c's only can be filed by Federal Government agencies, financial institutions, and credit unions. The question is does a junk debt buyer qualify as a financial institution?

Also, the document doesn't discuss at all the notion of a junk debt buyer writing off the full amount of a debt when in reality its losses are far less.

That info is so confusing.

I read only an original creditor can file the 1099c.

Can form 1099C include all interest and fees? Or just the debt as it was when charged off?

Here's another link that may help:

http://www.irs.gov/instructions/i1099ac/ar02.html#d0e261

The IRS has for quite some time required banks government entities to issue a 1099C for debt that was forgiven. The IRS thinking has been that if you borrowed money and never paid back the money, then that borrowing should be taxed as income.

Most charged-off debt is sold by original creditors to a debt buyer at a discount. The debt buyer then attempts to collect the debt. Around 2005 or so, there was a change in the IRS instructions that for the first time required debt buyers to issue a 1099c. The Debt Buyers Association was very much opposed to this requirement and filed suit against the IRS (DBA v Snow). The DBA lost that litigation in 2006.

Debt Buyers hate the idea of issuing a 1099c. It is not only an administrative expense but a litigation risk and the DB is subject to fairly burdensome IRS compliance audits.

The holder of the debt has no vote in the matter. They are required to issue the 1099c. The IRS has established a list of eight different situations under which a 1099c must be issued. Those triggers are:

1. A discharge in bankruptcy under Title 11 of the U.S. Code for business or investment debt

2. A cancellation or extinguishment making the debt unenforceable in a receivership, foreclosure, or similar federal or state court proceeding.

3. A cancellation or extinguishment when the statute of limitations for collecting the debt expires, or when the statutory period for filing a claim or beginning a deficiency judgment proceeding expires. Expiration of the statute of limitations is an identifiable event only when a debtor's affirmative statute of limitations defense is upheld in a final judgment or decision of a court and the appeal period has expired.

4. A cancellation or extinguishment when the creditor elects foreclosure remedies that by law end or bar the creditor's right to collect the debt. This event applies to a mortgage lender or holder who is barred by local law from pursuing debt collection after a ???power of sale??? in the mortgage or deed of trust is exercised.

5. A cancellation or extinguishment due to a probate or similar proceeding.

6. A discharge of indebtedness under an agreement between the creditor and the debtor to cancel the debt at less than full consideration.

7. A discharge of indebtedness because of a decision or a defined policy of the creditor to discontinue collection activity and cancel the debt. A creditor's defined policy can be in writing or an established business practice of the creditor. A creditor's practice to stop collection activity and abandon a debt when a particular nonpayment period expires is a defined policy.

8. The expiration of nonpayment testing period. This event occurs 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 plus any time when the creditor was precluded from collection activity by a stay in bankruptcy or similar bar under state or local law. The creditor can rebut the occurrence of this identifiable event if:
1. The creditor (or a third-party collection agency) has engaged in significant bona fide collection activity during the 12-month period ending on December 31 or
2. Facts and circumstances that exist on January 31 following the end of the 36-month period indicate that the debt was not canceled.

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.

It is hard to know which event triggered the issuance of your 1099c -- it could easily be #3 or #7. Trigger #8 is the biggie that is going to the driver of a great deal of this activity.

The DBA and the ACA have asked the IRS for guidance on all sorts of questions about how they are to prepare the 1099c. There are probably a thousand questions about what if this or what if that. Right now, no one really has any answers. The IRS has said they will probably respond to these questions sometime in 2008.

Until then, all you can do is look to the IRS instructions for guidance.



1. The issuance of the 1099 is not voluntary. The DB is subject to penalty for failure to issue the 1099c if it hits one of those trigger events.

2. I think the most debate will be in regard to debts that have not been validated. Forgetting for a minute that there is no consensus for how to define validation, there is absolutely no out in the IRS instructions for the DB to get around issuing a 1099 for a debt that has been disputed.

3. A debt that has been disputed and not validated does not mean that the debt never existed. It only means that the DB did not jump through certain administrative hoops. Those might be meaningful hoops for some purposes but those hoops are not grounds for failing to issue the 1099c. I think the DB would gladly bury those 1099s in a box in the basement if they could get away with it. I do not think the IRS is going to let them get away with it come time for the compliance audit.

4. There are zillions of debts in the portfolios of debt buyers where the DB has lost contact with the debtor. To me this is a very similar situation to the zillions of bank accounts where the bank has lost contact with the depositor. The IRS has a pretty consistent policy that I think will be applied in both situations -- send the 1099c to the address you got. The ones that get returned will go in a box to show the auditors. Otherwise, the IRS will then match up the IRS copy of the 1099 to the tax returns using the social security number. The IRS is very good at this. The taxpayer will get a bill for additional taxes for a 1099 they never knew about.

5. I recently had a interesting discussion with a fellow who thought that the issuance of a 1099c was continuing collection activity and thus an FDCPA violation. I have a hard time making that one fit from a logic perspective. Continuing collection activity means some sort of action intended to provide leverage or gain to the creditor in contravention of the FDCPA. I don't see a 1099 falling into that category -- it does not provide leverage or gain to the creditor. Certainly, it is not a voluntary action. It would be very difficult for me to see a federal judge punishing a DB for doing exactly what he was told to do by the IRS.

6. The IRS has been absolutely clear that a 1099c should not be issued in cases of identity theft. Not even the IRS expects someone to pay taxes on a benefit they never received. Anyone who has been a victim needs to be sure they had jumped through all the hoops with their creditors.

7. The area where everyone will be sharpening their teeth will be the notion of a "fraudulent 1099c". The adjective fraudulent is defined as: characterized by, involving, or proceeding from fraud, as actions, enterprise, methods, or gains. When people use the term fraudulent I think they really mean "in error" or most likely "I don't agree because no one ever proved to me (fill in the blank)".

8. As I read the instructions, the short version of what the IRS says about defining the amount of the debt to be reported on the 1099 is "everything less accrued interest and other penalties and fees" -- which says to me principal. But, I can think of several different ways to define principal for an old credit card. Which one? No one knows yet. The DBA and ACA are cautiously hopeful that the IRS will give them a definition they can work with. This could be a challenge as many of the older debts have no real history any longer and it is not exactly clear what part of the balance is principal and what part is something else. I have no idea what the DBs will do if the IRS does not provide guidance on this question.

9. Of course, nowhere in the IRS instruction does it specify that reporting the debt as forgiven means that it cannot still be collected or sold to someone else and collected. The General Counsel of the IRS has pretty explicitly stated that the issuance of the 1099c does not prohibit subsequent collection of the debt. Unsaid, but I think, logical, is the notion that a subsequent collection would trigger an amended or corrected 1099c to reflect the subsequent event.


I know this was probably a whole lot more than you wanted. Regardless, there will be many more folks following in your steps and dealing with this same issue. The quicker people get to thinking about this, the more helpful it will be.