Most Americans have no idea they may get a Tax Form 1099-C or 1099-A. Approximately 5.5 million of these forms are mailed out each year causing panic to the recipients, and shock to those who had no idea they now have to declare debt as income.
The dreaded 1099-C (Cancellation of Indebtedness Income) are forms for debts that were cancelled or forgiven by the creditor. If you received one of these forms from a creditor, the Internal Revenue Service (IRS) also received a copy of the form. You can not ignore or disregard the form or the IRS will assume the amount noted on the form is included in your income and you may end up owing thousands of dollars in income tax. The IRS treats forgiven debt as gained income – for which you should pay income taxes on.
After the housing bubble burst, the economy took a nosedive. Millions of Americans lost their jobs, income and/or hours were cut and many lost their homes. Medical bills went unpaid and credit card debt grew. No wonder these forms are disturbing.
There is also a Form 1099-A (Acquisition or Abandonment of Secured Property). This form is typically filed when a home or investment property is lost due to foreclosure or short sale, a car or another large property is repossessed. These forms are usually in the tens, if not hundreds of thousands of dollars. There was a Mortgage Forgiveness Debt Relief Act that began in 2007 allowing homeowners to exclude their mortgage debt cancelled by a lender. That relief act expired December 31, 2013. Despite the act’s popularity, it’s not clear at this time whether the act will be renewed to include 2014 and 2015. Many feel if the relief act is not renewed, the housing market may take another hit, something America can ill afford.
Creditors are required to file a Form 1099-C with the IRS, if the debt forgiven is over $600 of debt principal (the amount is not attributable to interest or fees). If you don’t receive the 1099-C, that doesn’t mean the creditor didn’t send one to the IRS. If you don’t report the forgiven debt when you file your taxes (in the year the debt was forgiven) you may receive a tax bill that may reflect IRS interest and penalties as well. You also open yourself up to an audit.
The 1099-C allows the creditor to write off the debt helping the creditor as the debt is a deduction. The 1099-C is normally sent 2 or 3 years after your default. Writing off the debt, the creditor is declaring they can’t collect on this debt (and neither can anyone else). If, you have a debt that is settled or negotiated for less than the full amount owed (debt reduction), you will receive a 1099-C for the difference (deficiency). In other words, say the creditor tells you they’ll write off a $10,000. debt if you pay them $3,000. (settle). You’re happy to have the debt gone, but will receive a 1099C for $7,000. (deficiency) that you have to declare as income.
If you’ve received a 1099-C, doing nothing is NOT an option. If you did receive a form – so did the IRS and they’re expecting their ‘due’. You may be facing a potential tax nightmare if you ignore the form.
There are exclusions and exceptions to reporting the debt as income and a visit to a tax law attorney will let you know if you fall into any of the areas of exception. This is one situation where it can really pay to get expert advice.
Tyler Murray, LL.M, of the Gantenbein Law Firm, is a licensed Denver, Colorado Tax attorney, servicing all of Colorado. Along with being a licensed lawyer, Tyler Murray has a Masters in Law in Tax. If you need tax audit defense, or are facing a tax appeal or other tax issue, or need professional assistance with your Colorado tax planning, contact experienced Denver tax attorney Tyler Murray at (303) 618-2122 for a one-hour consultation where he will discuss your situation and go over all your options with you.
Gantenbein Law Firm practice also includes Real Estate Law, Tax Law, Foreclosure Defense, Business Formation & Representation, Business Law and Family Law. This combination is exceptional in that it provides our clients a complete and full perspective of the most common issues surrounding your unique assets.
Please visit our website for more information: www.gantenbeinlaw.com