I Received A 1099-C. What Happens Next?

I Received A 1099-C. What Happens Next?
Eric Bank
By: Eric Bank
Posted: February 26, 2015
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Creditors use Form 1099-C to report the cancellation of a debt. The debt might have stemmed from a mortgage, a car loan, unpaid credit card balances or some other debt.

Cancellation means you don’t have to repay some or all of the debt. You may forfeit any property that was serving as collateral for the loan.

If the information on the form is correct — a big if — you might have include some or the entire forgiven amount in your taxable income. Even if you were anticipating the form and it looks correct, you still have to determine whether it creates taxable income.

But if the form comes out of the blue, or has an amount you don’t recognize, what happens next is you verify or dispute the information.

Is your 1099-C correct?

You will want to dispute a Form 1099-C that:

  • has an amount you don’t recognize
  • contains an incorrect description of event that precipitated the cancellation
  • you don’t believe pertains to you
  • represents very old debts

The IRS is not very precise about how to correct or dispute a Form 1099-C except to suggest you contact the form sender, straighten out the problem and have the sender reissue a corrected form. If this advice leaves you at a loss, the best way to proceed is to work with a credit repair company that has experience handling this type of problem.

IRS Form 1099-C

A blank 1099-C form. Always be sure to check your tax forms for accuracy.

Need help working with your creditors to reduce or cancel your debts? A debt relief firm may prove useful in the process.

Debt description

Box six of Form 1099-C contains an “identifiable event code” that is vital in determining whether you must include the cancelled amount in your taxable income.

Here are some frequently used codes:

  • A: Title 11 bankruptcy
  • B: Foreclosure, receivership or other judicial debt relief
  • C: Cancellation after expiration of statute of limitations for debt collection
  • D: Foreclosure election that precludes debt collection
  • E: Probate
  • F: Agreement between creditor and debtor, such as a short sale
  • G: Abandoned collection attempts
  • H: A three-year period in which the creditor receives no payment — you can rebut this event in several ways.
  • I: Any discharged that occured by the “identifiable event”

The codes are important because some of them absolve you of paying income tax on the forgiven amount.

Here are some examples:

Your mortgage lender forgives part of your mortgage to facilitate your continued ownership or for a short sale of your home. Through the end of 2014, a special law suspended the need to pay tax on the forgiven amount. The limit on this tax break was $2 million for married couples filing jointly. Code F.

You were bankrupt or insolvent — your debts exceeded your assets. Code A, others.

The debt was a student loan cancelled because you worked for certain employers after finishing your studies. Code F.

Other things to remember with 1099-Cs

File IRS Form 982 to exclude eligible forgiven debts from your taxable income. If you have to pay taxes on the cancelled debt, report the amount as other income on Form 1040.

Did you know there’s also a way to avoid paying taxes on discharged debts? If your total debt exceeds your assets, even after some of the debt was cancelled, you may not have to pay taxes on the canceled debt.

Didn’t receive a 1099-C but you had discharged debt the previous year? You’re still required to report it as part of your gross income.

For more information, read the IRS’s guide on how to handle canceled debts.

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