Credit 101

What Is a 1099-C? Your Top 11 Questions Answered

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“What is a 1099-C?” That’s the question millions of taxpayers will be asking as these forms land in their mailboxes this year. An estimated 5.5 million 1099-C forms will be filed for the 2012 tax year.

If you received one of these forms, your first reaction may have been one of panic. “Why did I get this?! What does it mean?!” Then you probably starting searching online to learn more — and that’s what brought you here.

So let’s get started.

1. What is a 1099-C?

A 1099-C reports Cancellation of Debt Income (CODI). A lender is supposed to file a 1099-C form if it “cancels” $600 or more in debt.  It files a copy with the IRS and is required to send a copy to the taxpayer as well.  Four common reasons for filing a 1099-C are:

  • You negotiated a settlement to pay a debt for less than the amount you owed and the creditor forgave the rest;
  • You owned a home that went into foreclosure and there was a deficiency (a difference between the home’s value and what you owed on it) which was either forgiven or remains unpaid;
  • You sold a home in a “short sale” where the lender agreed to accept less than the full balance due; or
  • You did not pay anything on a debt for at least three years and there has been no significant collection activity for the past 12 months.

If you’re not exactly sure why you are getting one of these forms, you hopefully will see a code in Box 6 of the form that describes the “identifiable event” that triggered the lender to send this form.  You can match that code up with the reasons listed on page 3 of Publication 4681.

TurboTax2. Does this form mean I don’t owe that debt anymore?

Not necessarily.  If you receive a 1099-C because you paid off the debt for less than the full amount due in a negotiated settlement, then clearly you don’t owe any more money. However, if the form was filed because you haven’t made payments for three years and they haven’t tried to collect recently, then you may still owe the debt. Your state’s statute of limitations may be more relevant in this type of situation.

3. If I get a 1099-C do I have to pay taxes on that amount?

Maybe.  The IRS will automatically assume that the amount listed on the 1099-C is accurate and expect you to include that amount in your ordinary income when you file your tax return. Depending on the other income you earn and your tax bracket, the result could be a larger tax bill or smaller refund.

However, if you can demonstrate that you qualify for an exclusion or exception, you may be able to avoid paying taxes on part or all of that phantom income. One of the most commonly used exclusions is the “insolvency exclusion.” It works like this: you are insolvent to the extent that your liabilities (what you owe) exceed your assets (what you own).  If the total amount by which you are insolvent is larger than the amount listed on the 1099-C, you can exclude the entire amount listed on the 1099-C from your income. You’ll have to file Form 982 with your tax return to claim this exclusion.  If you the amount by which you are insolvent is less than the amount on the 1099-C then you may be able to avoid including part of that amount in your income.

Confused? Read  1099-C In the Mail? How to Avoid Taxes on Cancelled Debt, then tackle the insolvency worksheet on page 8 of IRS Publication 4681.

Another popular exclusion is the Mortgage Forgiveness Debt Relief Act of 2007 which allows taxpayers to avoid paying taxes on up to $2 million of debt forgiven on their principal residence ($1 million if married filing separately). This exclusion only applies to debt used to purchase or improve the property and only if the discharge is directly related to a decline in the home’s value or the taxpayer’s financial condition. In other words, if you took out a home equity loan to pay off credit card debt and never paid it back, you aren’t going to qualify for this exclusion on that part of your debt. (Though you may qualify for the insolvency exclusion.)

The one thing you should not do is ignore these forms. If you leave this income off your tax return completely, you will likely get a notice in the future from the IRS. Depending on your situation, the IRS may inform you that you owe them money because you failed to include that amount in your income.

4. Why does the IRS expect me to pay taxes on debt I couldn’t pay in the first place?

Good question. The theory is that you received “income” that you didn’t pay taxes on, even if that income didn’t come in the form of a paycheck. That explanation is easier to swallow in some cases than in others. For example, if you used your credit card and paid for a $5,000 cruise but then never paid the credit card company, it does seem reasonable that the $5,000 your card issuer “gave” you should be considered taxable income. If this provision didn’t exist, then lending money to someone and forgiving the balance would be an easy to way to avoid taxes.

On the other hand, it’s harder to understand why these rules in situations where a big portion of the debt that was “cancelled” was due to exorbitant interest and fees charged by a lender. Or what about when student loan borrowers become totally and permanently disabled and get federal student loans cancelled as a result? They may get a 1099-C listing tens of thousands of dollars in CODI at a time when they can least afford it.

5. What happens if I don’t get a 1099-C for a debt I settled or for a debt I never paid?

The IRS expects you to pay taxes on cancelled debt regardless of whether this form was filed. Publication 4681 says: “Even if you did not receive a Form 1099­C, you must report canceled debt as gross income on your tax return unless one of the exceptions or exclusions described later applies.”

Most tax advisors we have spoken with suggest taxpayers with a clearly identifiable event — a short sale of a home or a negotiated settlement with a credit card company, for example — go ahead and include the cancelled debt in their taxable income for the year in which it happened along with Form 982 (if it applies) and an explanation to the IRS. If the lender tries to send a 1099-C in the future they can then explain they already reported that COD income.

Besides following the rules, there is another advantage to this approach. The insolvency exclusion is supposed to be calculated at the time the debt was cancelled. It’s much easier to figure out the insolvency worksheet for the current year — and much harder if you try to reconstruct your financial situation several years down the road.

[Related Article: Slew of Tax Tips To Clean Your Your 1099-C Mess]

6. What do I do if I don’t agree with the amount listed on a 1099-C?

There is no clear or specific procedure for disputing a 1099-C. The IRS does not offer a form that can be used for this situation. Most tax professionals we consulted for our series on 1099-Cs suggest that you try to straighten it out first with the creditor who issued the form. Creditors are supposed to provide a dedicated phone number on the form for recipients who have questions about the form they received.

If you can’t resolve it with the creditor, then you can include an explanation with your tax return.  Be forewarned, however, that this could trigger an audit of part or all of your return, as we explained in 1099-C Wrong? Taxpayer May Pay With An Audit.

7. I got a 1099-C for a very old debt. Is that legal?

This is another tricky situation, and we have received numerous complaints from consumers who have received these forms for bills they had stopped paying on long ago. Creditors who follow IRS guidelines should send out 1099-Cs when debts lie dormant for three years and there has been no significant collection activity for the past year. Specifically, the IRS instructions for 1099-C state:

“The expiration of non-payment 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.”

It goes on to say that the creditor can rebut this occurrence if “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.”

The problem is that if a creditor sends out a 1099-C years (or decades), after it’s supposed to, the responsibility falls upon the taxpayer to try to explain to the IRS why they believe it should not have been filed that year. Again, there is no specific form for reporting this kind of dispute. You’ll have to include an explanation and you may wind up arguing with the IRS to get it resolved.

However, taxpayers can take heart in knowing that a couple of Tax Court cases involving this issue were resolved in the taxpayer’s favor; specifically Stewart v. IRS (2012) and Kleber v. IRS (2011).

8. I didn’t pay a debt. How do I find out if a 1099-C was filed?

Call the IRS at 800-829-1040 and request a wage and income transcript for the tax year(s) in question. It should list any 1099-C that was filed under your Social Security number.

9. I filed for bankruptcy. Do I have to pay taxes on debts included in my bankruptcy?

You don’t have to pay taxes on personal debts discharged in bankruptcy. And creditors aren’t required to file 1099-Cs for those debts. If they do, however, you can file Form 982 and claim an exclusion because the debt was included in bankruptcy.

Don’t panic if your bankruptcy occurred long ago and you don’t know where to find a copy of your bankruptcy papers to prove the debt was discharged. Although it’s anyone’s guess why a creditor would send a 1099-C that is not required years after the fact, you won’t likely have to jump through hoops to prove the debt was discharged. Filing Form 982 will usually suffice.

10. Do I have to pay taxes on interest and fees that were later written off?

The 1099-C may or may not include interest. IRS instructions state that including interest on the form is optional. The same is true of “nonprincipal amounts” such as penalties, fines, fees, and administrative costs. It is up to the lender whether to include those. If they are included, you may or may not have to pay taxes on that amount. According to the IRS, “Whether the interest portion of the canceled debt must be included in your income depends on whether the interest would be deductible if you paid it.”

11. I received a 1099-C for a debt my ex was supposed to pay. What now?

The IRS generally expects creditors to file 1099-Cs for joint debts. Whether or not you are required to pay taxes on that amount depends on who actually receives a Form 1099-C showing the full amount of debt. If you and another person were jointly and severally liable for a debt that is canceled, each of you may get a Form 1099-C showing the entire amount of the canceled debt. However, you may not have to report that entire amount as income. The amount, if any, you must report depends on all the facts and circumstances, including:

  • State law
  • The amount of debt proceeds each person received
  • How much of any interest deduction from the debt was claimed by each person
  • How much of the basis of any co-owned property bought with the debt proceeds was allocated to each co-owner, and
  • Whether the canceled debt qualifies for any of the exceptions or exclusions we’ve described here.

Please understand that the information in this article is strictly for educational purposes. We strongly encourage you to get professional advice from an attorney or tax professional. Finally, if you are as frustrated by these forms as many of our readers, contact your elected officials in Washington and let them know the kinds of problems you are experiencing.

Finally, if you’re worried about how your debt or other issues could be impacting your credit, you can check your credit each month using Credit.com’s free Credit Report Card. This completely free tool will break down your credit score into sections and give you a grade for each. You’ll see, for example, how your payment history, debt and other factors affect your score, and you’ll get recommendations for steps you may want to consider to address problems. In addition, you’ll also find credit offers from lenders who may be willing to offer you credit. Checking your own credit reports and scores does not affect your credit score in any way.

For more information, check out our other articles on 1099-C forms.

Image: David Sacks

  • Dona Collins

    Thank you so much for this detailed explanation of the 1099-C. I talk to friends and clients about the implications of settling debt all the time, especially when we talk about short sales on homes. It is often hard for people to recognize that while a short sale is saving them from foreclosure and *more* credit damage, there are still implications. The difference between the value of the home and the settled upon amount is not a “gift” from the creditor. Still, the amount you’d owe the bank or the damage to your credit would be far worse than the taxes you owe on the difference, so I still think it’s a win-win situation in the end.

    • http://www.Credit.com/ Gerri Detweiler

      So true – though if it is their primary residence they may be able to avoid paying some or all tax on that debt. Still it’s complicated enough to often require help from a tax professional – and waiting a few years after the fact to just see what happens it’s a great idea.

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  • http://mike@gunshops.com Mike Gray

    Had an accident, wife didn’t think I would work again. divorced I wanted to improve myself
    I went back to college. I couldn’t do it. I got a 1099c for 57k+ I am now married again.
    It is not fair to my wife for my debt. I didn’t plan to get hurt and I know the IRS could care less. Should I file separately and try for insolvency? If it weren’t for her I would be homeless on what I get from social security.

  • VIJI IYER, CPA

    I have a client who received a 1099c with Interest included in the debt forgiveness by agreement. He also received a 1098 for the mortgage interest. Should I take 1098 interest on Sch A and report interest forgiven as “other income” to keep numbers distinct.

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  • Carol g

    I just received a 1099-c from a debtor my deceased sister owed. She passed away 2 years ago and we have no reason to file another tax return. Do we have to file for her again to let the irs know she is deceased.

  • Troy Morris

    My mother had a credit card that I was listed as an authorized user. I helped her run a business with it and later used it for her bills etc… I had very little credit and never had a credit card myself. In 2009 she died and some how I became the owner of her debt. I asked for the records and they sent me from 2009 on but nothing from while she was alive. I challenged the debt but they insist that it is mine despite the fact that they would have never given me a credit card in the first place. Now they have sent me a 1099-c that says they will report the principal balance to the IRS. $4800.00 and that they will continue to provide account information to the 3 credit bureaus. What can I do about this?

    • http://www.Credit.com/ Gerri Detweiler

      Troy – I don’t know of a simple way to dispute this as the IRS does not, to my knowledge, have a form that allows you to report that a debt for which you received a 1099-C was not yours. My understanding is that you’ll probably need to send the IRS a letter of explanation. We talked about disputing 1099-Cs in a couple of other articles: Tax Help: How to Dispute A 1099-C Form.

      I would also suggest you file a complaint against the card issuer with both the Consumer Financial Protection Bureau and the Taxpayer Advocate

  • http://www.credit.com/ Credit.com Credit Experts

    If someone steals your personal information and uses it to open an account anywhere, that person should be held responsible. That is identity theft. You can read more here: Identity Theft: What You Need to Know

  • http://www.Credit.com/ Gerri Detweiler

    What a great question Michelle. I wrote about those payments more in this article: Double Whammy: Mortgage Settlement Payments Will Be Taxed Part of it may depend on what kind of payment you received. This IRS publication further describes how to handle these payments: http://www.irs.gov/irb/2014-2_IRB/ar09.html

  • http://www.Credit.com/ Gerri Detweiler

    You are not likely to get one. We wrote about HAFA payments and 1099-Cs in this article: More Confusion Over the 1099-C

  • http://www.Credit.com/ Gerri Detweiler

    State exclusions don’t all match the federal exclusions but unfortunately I don’t have a list for all states. You will need to consult a local tax professional.

  • Rachael

    My ex-husband and I sold our house in a short-sale last year, so the debt should be forgiven based on the Mortgage Forgiveness Debt Relief Act of 2007 . The bank sent us one 1099-C, so how do we file the information? Do we both enter the entire amounts, or do we divide them in half? Or does it not matter since it is all forgiven debt? His social security number is the main number on the account and the bank sent the 1099-C to him. I can’t find the answer to this question anywhere.

    • http://www.Credit.com/ Gerri Detweiler

      If they sent it to him with his social security number then I would expect he would file it. (The form goes to the IRS so they have the same information you do.) But it is one of those areas I haven’t found complete information about either, so you may want to check with the IRS.

  • http://www.Credit.com/ Gerri Detweiler

    The creditor says that you did not pay this debt and as a result it is considered “income” that you must include in your taxable income for the year unless you qualify for an exclusion such as the insolvency exclusion. You will find more information in this article: http://blog.credit.com/2013/01/what-is-a-1099-c-your-top-11-questions-answered-64306/#comment-1238336196

  • http://www.Credit.com/ Gerri Detweiler

    Corrine – Was this a joint debt or hisindividual debt? Are you talking about student loans? Was the amount very large?

    Our condolences for your loss.

  • http://www.Credit.com/ Gerri Detweiler

    You can request a wage and income transcript for your 2012 tax year that should provide information about the 1099-c. But it sounds like the main thing you need to do is to see whether you qualify for the insolvency exclusion. If you do, you can amend your 2012 tax return and hopefully avoid paying this tax bill. In addition to the articles referenced in the article above, there is some helpful information in Daniel J Pilla’s book How to Eliminate Taxes on Debt Forgiveness .

  • http://www.Credit.com/ Gerri Detweiler

    How long has it been since you paid anything on this? The statute of limitations may have expired. In addition, some consumers have been able to use the 1099-C as evidence that the debt has been “cancelled” and shouldn’t be collected. (Can’t rely on that defense in all cases, but it has been used successfully by some.)

  • http://www.Credit.com/ Gerri Detweiler

    The amount they list as cancelled debt in Box is the amount of cancelled debt that you must include in your income unless you can show you qualify for an exclusion or exception. Many people do, so make sure you read Publication 4681 and/or consult a tax professional for help.

  • http://www.Credit.com/ Gerri Detweiler

    As I mentioned in another comment, you need to decide whether to fight the creditor or pay the debt and amend your tax returns. One question is how long has it been since you paid anything on this bill? The statute of limitations may have expired for them to collect the debt. In addition, some consumers have been able to use the 1099-C as evidence that the debt has been “cancelled” and shouldn’t be collected. (Can’t rely on that defense in all cases, but it has been used successfully by some.)

  • http://www.Credit.com/ Gerri Detweiler

    Unfortunately it doesn’t matter whether or not he received his degree. If he didn’t pay back student loan debt, a 1099-c is issued. You have to include it in your taxable income unless you can show you qualify for an exclusion. You may qualify for the insolvency exclusion. It is described in detail in IRS Publication 4681.

  • http://www.Credit.com/ Gerri Detweiler

    It’s doubtful as the threshold is $600 or more in cancelled debt. They could send one, but probably not.

  • http://www.Credit.com/ Gerri Detweiler

    You’re right – you are going to need a tax professional with experience in these forms. Make sure you find someone who knows what they are doing. And so is his cosigner unfortunately.

  • unsure in AZ

    My home was sold in a foreclosure in 2012. I received a 1099 A in 2013 and filed last year. I was told I would receive a 1099 C this year and as of yet I have not received anything. Is there a way to find out if they filed with the IRS without contacting me?

    • http://www.Credit.com/ Gerri Detweiler

      You can request a wage and income transcript for the year which will list all income reported. But it may be a little too early to do that since my understanding is the creditors have to transmit those forms to the IRS by the end of February. You may want to contact the IRS for more information: http://www.irs.gov/Individuals/Get-Transcript

  • http://www.credit.com/ Credit.com Credit Experts

    Unfortunately, we are not tax professionals. We’d recommend talking with a tax professional or visiting a tax preparation site where you can ask this question. (Also, the form you’re referring to is most likely Form 1098, where mortgage interest is reported; a W-2 form is a wage and tax statement from an employer.)

  • http://www.Credit.com/ Gerri Detweiler

    My understanding is that she should file to report the 1099-c “income” and back it out with Form 982 if she qualifies for an exclusion. Otherwise the IRS will consider it taxable income and she may be notified that she owes money or is entitled to a smaller refund. (Unless the amount is so small that she still doesn’t need to file.) You can learn more here: http://www.irs.gov/uac/Do-I-have-to-File-a-Tax-Return%3F

  • disqus_qKz1SsQBf4

    My 2012 return was audited and they found that I hadn’t filed at 1099-C for a charged off debt. I never received the 1099-C and had no idea it had been charged off. I went through a difficult divorce and lost my shirt, to say the least, so I’m not all that surprised by the charge off, but I was never made aware of it, either. The interest/fees on the debt are almost double the amount of the original debt. I am working with my tax professional on the filing side, but I have two questions I hope you can answer. Is there a limit (%) amount that can be charged in interested in relation to the original balance? Also, will this item now be removed from my credit report?

    • http://www.Credit.com/ Gerri Detweiler

      This is actually a very important question if you don’t fully qualify for the insolvency exclusion. If you think you were overcharged in interest you should consider disputing the 1099-C in writing with the issuer. But whether they did overcharge you is difficult to ascertain. We wrote about that here: Can a Debt Collector Double My Debt?

      This article covers disputes: The Little-Known Form for Avoiding a Big Tax Bill

      The 1099-C has nothing to do with how long the debt is reported on your credit reports. That’s covered under federal law.

  • http://www.Credit.com/ Gerri Detweiler

    Dispute the 1099-c with whomever filed it whether that is the original creditor or the collector. As for whether it is on your credit reports, you’ll need to check that by getting your free annual credit reports.

  • JRB

    Can insolvency relieve taxpayers of income tax with amounts on Box 6 coded G?

    • http://www.Credit.com/ Gerri Detweiler

      Yes if you qualify.

  • http://www.Credit.com/ Gerri Detweiler

    It doesn’t necessarily mean the debt is forgiven. The IRS says a 1099-c must be issued if there is no substantial collection activity for three years. If the creditor or collector tries to collect the debt, though, I would suggest you consult a consumer law attorney. There have been some cases where consumers have asserted that the issuance of a 1099-c means the debt is forgiven. (The IRS does NOT take that position, however.)

  • http://www.Credit.com/ Gerri Detweiler

    Victoria – It certainly sounds like you may qualify for the insolvency exclusion. Your first step is to fill out the insolvency worksheet in Publication 4681. If the amount you are insolvent exceeds the amount of cancelled debt then you fill out Form 982 indicating that and attach that to your tax return. Complete instructions can be found in Publication 4681. (Look at the example for “Greg” on page 5.)

    • Victoria

      Thanks! I did the worksheet and filled out the form..my only question now is: why would I have to include a 1040? I have no income. I can’t take any deductions because I haven’t been working. So I don’t understand why I would have to send this in.

      • http://www.Credit.com/ Gerri Detweiler

        You need to show the IRS why you are not including that $105,000 in your taxable income. They received the 1099-C and assume it is income unless you can demonstrate otherwise. Oh and be sure to keep a copy of your worksheet and any supporting documents for your records in case they question it.

  • http://www.Credit.com/ Gerri Detweiler

    Yes, as it says in the example for Greg that I pointed out above, you do not enter the debt excluded as income. If you have no other income then you enter “0.” As for the rest of the tax return, I am sorry but I am not a tax expert so I can’t help with that. However, it’s my understanding that most of the major tax preparation software programs support this form so you can always go that route if you don’t know how to handle it yourself.

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