Annual 1099-C Don’t Freak Out Reminder!
Every year, we get panicked emails, phone calls, carrier pigeon messages from clients who filed for bankruptcy and then received a 1099-C in February when tax forms start coming out. Don’t panic. Here are the thoughts that are running through your head:
A 1099-C is issued when a creditor cancels or forgives debt. For example, if you settle an account by paying $1,000 and the creditor cancels $5,000, then you will receive a 1099-C to pay income on the canceled debt of $5,000.
Wait, what?? I have to pay income taxes on debt that is canceled?
No, a 1099-C does not automatically mean that you owe taxes. It means that you need to determine if you are required to pay income taxes or if there is an exception that you qualify for to exclude the amount from your income. Don’t panic yet.
Ok, so what are these magical exceptions? And why are you telling me not to panic?
First, if you filed for bankruptcy, you do not owe income taxes on debt that is canceled in bankruptcy. That is one of the benefits of bankruptcy over other debt resolution options and one that should be explained to you by anyone talking about your debt options.
Second, even if you did not file for bankruptcy, there is still the possibility that you can show that you are insolvent to exclude some or all of the canceled debt.
There are a few other exceptions, but these are the two that mostly apply to settled accounts and bankruptcy.
Ok, I’m calm now. How do I let the IRS know that I fall into one of these exceptions?
There is a magical IRS form out called Form 982. On this form, you can let the IRS know which exception applies to your situation. There is some math involved, depending on the exception, so we recommend you speak with your tax preparer about how to fill out the form.
Bottom-line: Don’t panic. Getting a 1099-C is just a notification from a creditor that debt has been canceled. If you don’t deal with it, then it becomes a problem. However, dealing with it can save you a lot of headaches in the future.
This is just a basic overview and is not legal advice specific to your situation. If you have questions about your rights when it comes to debt and credit, you should speak with an attorney in your area for legal advice. If you live in California or North Dakota and would like to speak with Jen Lee Law regarding your situation, please schedule an appointment.