1. The creditor (or a third party collection agency on behalf of the creditor) 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 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.”
So now the IRS seems to be indicating that if the creditor packaged the debt for sale, the requirement to send the 1099-C after 36 months of non-payment does not apply. Again, though, this is of little help to taxpayers. How will they know if that occurred, much less challenge it?
Taxpayers Want Answers: Good Luck With That
In researching this story, I queried the IRS multiple times with no response. I also reached out to the Senate Finance Committee, under whose jurisdiction the IRS falls, and attempted to reach the Taxpayer Advocate, which has written about this issue in reports to Congress. I received no reply from any of these agencies.
I also reached out to a number of tax professionals with varying degrees of success. Some gave conflicting advice while others felt the IRS has not provided adequate guidance to taxpayers on this specific issue. Most tax advisors encouraged taxpayers to get professional advice if they have received a 1099-C for an old debt. While I agree wholeheartedly, it is troubling that the taxpayers who would most need professional assistance to navigate this complex issue are the ones who may be least able to afford it. After all, financial difficulties are what led to them getting a 1099-C in the first place. Indeed, a few Credit.com commenters told us that they don’t normally have to file tax returns due to their limited incomes, and can’t afford professional advice.
Your Options If You Get a 1099-C For An Old Debt
My husband had a car repo in 2002 from Toyota. Last year (7 to 8 years later) we got a 1099 from Toyota saying they settled out debt for $3498.00. It was a weird looking letter and statement so I thought it was a sales gimmick and disregarded it. Now I have a letter from the IRS saying we own $480.00 from this debt cancellation. Can this be done? —Laura
The consensus amount tax professionals I spoke with for this story seems to be that the taxpayer who receives one of these forms should first try to find out if he or she can avoid paying taxes on cancellation of debt income (CODI) by qualifying for an exclusion or exception, such as the exclusions for debts discharged in bankruptcy or due to insolvency. I discussed these in more detail in my first article, 1099-C In the Mail? How to Avoid Taxes on Cancelled Debt. If you qualify to exclude that income from your taxable income for the year, you may find it easiest to file Form 982 with your tax return and be done with it.
[Related Article: More Confusion Over the 1099-C]
But what about someone who receives a 1099-C for a debt that is years—or decades—old? While they may have been insolvent by IRS standards at the time the debt was forgiven, their financial situation may be much different now, and income reported on a 1099-C could mean a big tax bill. Do they have any options?
When I asked Rob Deines and Tony Palizzi, tax associates with ProVision PLC, about a taxpayer who received a 1099-C for a debt that was written off two decades ago, their view was that the creditor was wrong in sending it so late. “They don’t get to choose when they send the 1099-C,” says Deines. “If they haven’t tried to collect that debt in 10 or 20 years, then they are severely delinquent (in filing Form 1099-C).”
While you can dispute the 1099-C with the creditor that issued it, don’t be surprised if they don’t fix it. “You probably won’t be successful in getting a corrected 1099-C,” says Phillip P. Guttilla, shareholder with Polsinelli Shughart PC. “You’d have to dispute the 1099 (with the IRS). ” He adds:
In tax audits, the IRS and taxpayer will often disagree over when cancellation of a debt occurred. The taxpayer may argue that cancellation of a debt occurred in a year on which the statute of limitations for assessment of additional tax has run and the IRS will take the position that the debt was discharged in a year that is still open to audit. A taxpayer recently won a case with the IRS over the timing of the discharge of debt.
It appears the IRS expects that taxpayers may have questions or disputes with the creditors about these forms. In the instructions, it states: “The creditor’s phone number must be provided in the creditor’s information box. It should be a central number for all canceled debts at which a person may be reached who will insure the debtor is connected with the correct department.” (It’s too bad the IRS doesn’t publish a dedicated IRS phone number for taxpayers who have questions about this issue!)
[Credit Cards: Research and compare credit cards at Credit.com]
A Loophole Perhaps? If You’re Brave Enough
If a taxpayer claims a 1099-C should have been issued years before, will the taxpayer then be required to file an amended tax return for the year in which the 1099-C should have been issued? Not necessarily, says Deines. The statute of limitations for the IRS to assess the tax generally expires 3 years after you filed your return. However, there is no statute of limitations for assessing and collecting tax if no return has been filed.
Dienes and Palizzi warned that there is no guarantee this approach—claiming that you don’t have to pay taxes on COD income that should have been reported years ago—will work. It is certainly advisable to work with a tax professional.
Whether taxpayers who have already struggled with paying their debts will want to wrangle with the IRS on this issue remains to be seen. ”No one really knows how aggressive the IRS is going to be,” warns Gutilla. “Get good advice and make sure you follow the rules. If you get caught, you may end up paying taxes and penalties.”
You may also want to read: What is a 1099-C? Your Top 11 Questions Answered