irs involvment

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a debt collection company "threatened" this, not sure if i should ignore it or try and get it validated b/c i think its about 7 or 8 years old

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[SIZE=3]A debt collector should not randomly file a 1099 form on a debt. If they did then you would need to dispute the debt with both the debt collector and the IRS. I think it would take a little bit of work to clean up the mess with the IRS but it should not take much more than a call and a letter stating the debt is not valid. [/SIZE]

In order for a debt collector to move through the process properly, first, the debt must be settled for an amount less than what was owed. In order for that to occur, you would have to agree that you owed an amount and agree upon what the settlement amount is or they would have to sue you and obtain a judgment which is basically a forced agreement. If the debt is outside the SOL and you use it as a defense if they sue then they would not obtain a judgment. As long as you deny owing the debt then a settlement would never be reached. If a settlement is not reached then the 1099 should never be filed.

[SIZE=3]If a settlement is reached, after the settlement is paid or judgment is satisfied, then a collector is required to file a 1099 on the remaining owed as income. You would be required to pay tax on it because the IRS looks at the amount as a sum of money that you obtained as a loan, but did not pay back which is equivalent to income. It is important to note that the IRS requires lending institutions to file these documents. A collection agency does not benefit much by filing these. I think the most they could claim would be the difference between any money they obtained for the debt and what they bought the debt for. Most of the time collectors buy these debts for very little money, which would result in virtually a zero dollar write off. If a collector reached a settlement then they would have made a profit and actually be required to file as business income. In this case the 1099 doesn???t help them at all. The original creditor did benefit at some point in time by writing off the bad debt though. [/SIZE]

[SIZE=3]In my opinion, I find the entire debt forgiveness as taxable income pill incredibly difficult to swallow. Creditors always inflate the amount owed anywhere from 2x to 10x the borrowed amount because of penalties, fees and interest. The problem is the IRS expects the inflated amount to be reported as earned income when in reality the individual actually obtained a much smaller amount of money. Furthermore, if an individual used the card for an extended period of time while paying high interest and fees, it is quite possible that they actually paid the creditor much more than they ever received in benefit. Basically, the 1099 is a vehicle used by the IRS to squeeze more money out of tax payers. I have been fortunate in that the creditors never filed 1099 forms for the debts I have settled. Also, if you qualify as insolvent then you can get out of the tax. I have also seen posts on these boards about wording of settlement agreements stating settled in full and modifying the amount owed to match the amount paid as a method to not pay tax. I do not know if any of these methods would work consistently. [/SIZE]

its from a zales account, debt company is CRA. Im in TX. I want to ask them to validate this debt but afraid that will re start the time clock you know...

[COLOR=black][SIZE=3]Asking a collector to prove a debt is not past the SOL, they own the debt and can legally collect, you owe the debt by providing signed contractors and the other medley of items found on the DV letter would never reset the SOL time clock. Things that could reset the SOL include agreeing to the debt or making partial payments on the debt.[/SIZE][/COLOR]