1099C – do I have to pay tax on forgone debt?

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.


Now, I'll share some personal thoughts and perspectives and guesses:

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.

Thanks for your explanation. It is informative. That took a lot of time.

No collection agency has told me I am getting a 1099C. My debts are about to be SOL and I worry I will be issued a huge inflated 1099c for several old credit cards with original balances at $6000, total. (now they collection companies say I owe $21,000...interst and fees)

I am concerned with what time frame and dead line a collection agency can send a debtor a 1099c. The IRS needs to specify a dead line, such as 2 years after the SOL, or something. If they don't, the collection agencies will be issuing 1099C forms for decade old debts that can't prove belong to the debtor.


If they issue 1099C forms to people for old debts back into the 90s there will be a big problem with fees, interest, and what the original debt default amount was and what the debt was for. There will be a problem with divorced people saying the ex is responsible for the old debt.

I think people will be declaring bankruptcy becasue they can't afford taxes on old debts with inflated fees and interest.

I just had an interesting course in 1099C... when you do receive them have your tax person find out if you were insolvent at the date of cancellation, it is an extra step but that way the whole amount is not taxable, if you can prove insolvency up to the full amount then nothing will be taxable.

We never got a 1099c for an old car loan, 2 years later the Federal sent us notice we owed $1400. We paid it and now, 2 more years later (4 total) our state wants 700 + 400 in interest!! I find it rather crooked on the governments part to charge me interest when I had no clue!

NASCAR DEVIL YOU REALLY ARE GREAT!!!
YOUR POSTS ARE VERY INFORMATIVE.
ABOUT 1099-C ...
THANK YOU!!! 8) :lol:

The question I have is this. If a DB purchases a $5k credit card debt for $100. What the DB didn't know at the time was that the original debt was past SOL. They are now required to issue a 1099C because of the SOL. How can the DB issue a 1099-C for the original $5k when they only have actually $100 into this old account?

What do you do with a 1099 on a person who is deceased for going on 5 years? There was never anything filed against his probate. The SOL ran out in 2007? How do I answer to the IRS for this? I was never notified of any cancellation of debt until I received the 1099c this week.

Above it states that

"Unsaid, but I think, logical, is the notion that a subsequent collection would trigger an amended or corrected 1099c to reflect the subsequent event. "

This to me could not be correct, because if I pay the tax once on the debt through one 1099c, I should not be liable for it again, regardless of whether or not a different DB purchases it. As I understand it, it's treated as income- I only pay tax on the income I earn that year... anybody know?

I received a notice for the IRS that I owe taxes for an unreported 1099c for 2006 from a very old credit card debt that myself and my ex husband had, stating I owe$900+ in taxes and penalities I had disputed this several years ago and shame on me when it never re-appeared on my credit report thought is had been taken care of.

Amazingly, two weeks later a collection company, which I've never heard of sends me a great deal to pay this debt off for less then the amount that was even reported to the IRS.

Two questions can the original debt holder write the debt off, issue a 1099-c, which was never received and sell it to a third party for collection? Can I fight this with the IRS using the new notice from the collection agency which shows a reduced original debt amount than being reported to the IRS?

If we have not received a 1099c form from the financial institution that foreclosed on us, how can we get one. I have emailed Homecomings Financial, but cannot get through by phone. Is there anywhere to report such lack to the IRS? Do we have any recourse for getting this information in order to file our taxes?

Thank you,
Jennifer

I just got a 1099c from zombie DC. IF it is even true, the possible debt is 10 years old. IF it is possibly an old debt, how can I be 1099'd for some account that may be loaded with interest and penalties? I have contacted the DCA and denied the debt. But how do I deal with the IRS to resolve any issue with a possible error filled 1099 without actually triggering a reset of the SOL if it is in fact an old debt? If I accept and pay the taxes on this 1099, is that not an admission that I owed the debt, which is also a trigger to rest the SOL?

Is it possible to get a 1099-c for a debt as old as 10 years if the sol is just 3???

somebody let me know does the 1099-c tax relief program has a due day?

please somebody let me know if the 1099-c tax relief program will expire and if so , when is the due day?

I received a 1099c for outstanding credit card debt cancellation on my wife who deceased on 9/2007. It was cancelled on 12/31/2009. I filed chaper 7 banktruptcy in 2008 which was discharged in 2008. The 1099c was addressed to her estate,
but there was no probate. Do I have to report this as income on my return for 2009?

I just received a 1099-c for a debt that was first paid through garnishment, then i received a letter that i owed 735.0o more which was paid. Finally, I received a letter from the plaintiff through the courts that the judgement was settled and finalized. Now I get a 1099 saying I was forgiven for 613.00 What good is warrant of satisfaction of judgement?

Do I have to report a 1099-c on a credit card dept for my late Husband who doed in 2000?
I just received it this year.

my question is since you need to add old debt on your taxes as other income.... on your credit report is that old debt changed from settled in full to paid in full....

My 2nd mortgage 1099 C me. Based on their decision to do so I agreed on a settlement with my 1st. Now the 2nd has sent me a corrected 1099C saying they sent the 1099C "in error"? What legal rights do I have seeing that I made an agreement based on their decision?

my sister just received a 1099-C for a car that was repossesed in 1999. The explanation is that it represents the difference between the note and the amount received for the car at auction (presumably received 10 years ago). Is there a statute of limitations?

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:pI received 1099 c on 4 different settelments through Debt managment. The settlements all were quoted payed in full. Do I have to pay taxes on the settlements and what if I do not receive a 1099 C on one.

If you are issued a 1099c then they can not collect on the debt any further as it is canceled by issuance of the 1099c. The collection companies can not double dip, especially if it past the statute of limitations.

The question I would like to have answered is about the 3 year testing period. That is supposed to start beginning when you did not make a payment and it subsequently went into default etc. After that 3 year period they were REQUIRED by the IRS to file a 1099c. So say you have a credit card that went bad in 2002 and now 8 years later it is passed the statute of limitations for collections. The had until 2005 or (2006) as it is a 36 month window to send the 1099c. There are supposed to be heavy fines for not doing so. The other issue is how are these rogue collection companies being able to use the threat of 1099c when first of all they do not have legal right to collect as the statute of limitations has passed and how is the 3 year testing period validated here.

It would be really nice if the IRS had some better guidelines on this as well as some statute of limitations on the filing of these 1099c things also.

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If your $55000 in credit card debt and have reverse mortgaged your home and do not own anything , and only have $2000 a month in Social security income how bad does a 1099C effect you with the IRS? To me it doeasn't make sense to negoiate lower terms to pay off your credit cards.

:twisted: yes u do doesnt matter u still got 1099C and u will have to file tax those 3 yrs testing period it all lie.... dont believe it even sol ran out you will still got 1099c and wont stop collection activity. good luck

Question - I live in California and defaulted on a $25K credit card debt back in December 2002. Never paid anything or negotiated anything since then. The SOL is 4 years so it became uncollectible back in roughly 2006. It just rolled off my credit report recently. TODAY I got a 1099-C from the original creditor cancelling the entire $25K as of 5/31/10. Now, I can probably avoid paying taxes on it because I meet the IRS insolvency test for this debt. But my question is - can this cancellation be added to my credit report even though the original debt is more than 7.5 years old? Also, am I in for other nasty surprises in the future as other companies decide to issue me 1099-C's many years after I defaulted?

I'm beginning to think I should have just declared bankruptcy 8 years ago then I wouldn't still be dealing with this.

i HAD 3 DEBTs negotiated last year but only got one staement that I owed taxes. when do they have to notify by and when do I have to pay it.If I pay my taxes now am I responsible to pay this year if notified later?

Fiance' received a 1099c from a credit card settlement.. can I still claim her as a qualifying dependent or does she have to file on her own?

I have just received a debt cancellation 1099c from debt collector on a joint credit card account that became inactive in 2002. My wife filled for chapter 13 and we completed all the payments required by the court last December. This account was discharged on her case. My question is , Do I have any recourse as a married filling jointly joint to reduce the amount reported by 1/2? or The statute of limitation (an 8years old debt) applies to this notice?