The IRS Form 1099-C is an informational statement that reports the amount and details related to a debt that has been canceled. You can expect to receive the form from any lender that canceled the balance you owe, and they no longer consider you responsible for repaying it. You must include this canceled debt as income when preparing your federal tax return for the year in which the debt was canceled.
How does Form 1099-C work?
When a company extends money to you when you borrow, which may come in the form of a loan distribution or credit card purchase. In any case, you must enter into an agreement to repay that money. This is not considered income, or taxable, as you will not retain it.
The money becomes income and can be taxable when the lender cancels the agreement that requires you to repay it. Form 1099-C reports this income and its various details, and you will receive a copy of it. The Internal Revenue Service also receives it, and the government expects you to include the income on your tax return.
Who uses Form 1099-C?
The Internal Revenue Service requires companies to send 1099-C forms to consumers when a lender cancels or forgives more than $600 of debt. There are no requirements to notify you of the tax implications of the debt cancellation or forgiveness, but they are obligated to submit a 1099-C form to you and the Internal Revenue Service as well. You will use it to accurately report income on your tax return, and the Internal Revenue Service will include it in your file.
What to do if you do not receive Form 1099-C?
Contact the lender if you know you have a loan canceled above the $600 threshold but you have not received Form 1099-C. The omission could be due to an administrative error, or perhaps the lender does not have your current address.
Do not make the mistake of omitting the income from your tax return just because you did not receive the form. This could lead to penalties from the Internal Revenue Service.
It is also possible that you may not receive Form 1099-C if the loan is not considered reportable to the Internal Revenue Service. There are some situations where a loan can be canceled, but you do not have to report it as taxable income:
- There are no reporting requirements if the debt is canceled as part of a bankruptcy unless it was incurred for business or investment purposes.
- Certain student loan cancellations may be excluded from taxable income. This includes student loans canceled to meet employment requirements, loans canceled after December 31, 2020, and before January 1, 2026, and debts canceled under a student loan forgiveness program.
- Mortgages on primary residences that were lost in foreclosure or sold in a short sale, or from a restructured mortgage loan, fall into the non-reportable category. You still need to include this forgiven debt on your tax return, but on IRS Form 982.
Your local tax laws may differ from federal tax laws regarding canceled debts. Consult a tax professional such as a CPA or attorney to confirm your state rules regarding reporting canceled accounts as taxable income.
How to read and use Form 1099-C?
The name and information of the creditor that canceled your debt will appear in the upper left corner of the form. This section also reports the creditor’s tax identification number, your Social Security number, your name, your address, and the account number for the forgiven loan.
The numbered boxes all pertain to your debt:
- Box 1 tells you the date the debt was canceled.
- Box 2 indicates the amount forgiven of the debt.
- Box 3 reports any interest that may have been included in the amount in Box 2.
- Box 4 describes the
- Box 4 refers to the debt involved.
- Box 5 indicates whether you are personally liable for the debt.
- Box 6 is provided for a code that identifies the reason for the cancellation of the debt.
- Box 7 provides the fair market value of any property associated if the loan is a mortgage or a car loan or for any other purchase of a single item.
Requirements for Form 1099-C
You do not need to submit Form 1099-C with your tax return when filing, as the IRS has a copy of it. However, you should include it with your other financial documents when you go to your tax preparer.
Make sure that your tax professional has experience with this type of income. You don’t want this issue to come back to haunt you. Your tax return may be denied if you fail to include this income, or the IRS may simply correct your return and adjust your refund or send a bill for any additional amount owed if you do not include the income.
You may face fines and other penalties if the income is not reported, and no related tax is paid on time.
You may also want to speak to a tax professional if you were insolvent at the time of the debt cancellation, as you may not have to report the income. You were insolvent if your total liabilities exceeded the fair market value of all your assets at that time. You had negative net worth at the time the loan was canceled, so you can file IRS Form 982 for exclusion of canceled debts due to insolvency.
Frequently Asked Questions (FAQs)
How can I avoid paying taxes on Form 1099-C?
The lending company issues Form 1099-C when it cancels or forgives a debt of more than $600. If your debts are canceled, it is considered taxable income. However, there are some exceptions and exclusions where canceled debt may not be considered taxable income even if you receive Form 1099-C. These include debts canceled under bankruptcy or insolvency, cancellation of certain student loans, mortgages on primary residences that were lost in foreclosure or sold in a short sale, and others.
How can I contest Form 1099-C?
If you receive an incorrect Form 1099-C, contact the lender to correct the information on the form. Issuing Form 1099-C by the lender while trying to collect the debt is a common mistake. If the lender does not correct the information, report the canceled amount listed on the incorrect Form 1099-C on your tax return, but also attach an explanation of why the lender’s information is incorrect.
Source: https://www.thebalancemoney.com/tax-form-1099-c-for-reporting-cancelled-debt-960810
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