Tax forms can be confusing and can get your head spinning. For example, 1099-C, what is that, and why have you received it in your mailbox? Well, in this blog post we are going to explain all your 1099-C questions.
What Is a 1099-C?
Craig W. Smalley, EA, CEO of CWSEAPA, (brand of Accounting and Financial Services) said,
“A 1099-C is a document sent by a bank when they have canceled debt. For instance, if you have negotiated with your credit card company to pay them a lesser amount than you owe them, the difference would be reported on this form.”
Bruce McClary, the VP of communications at the National Foundation for Credit Counseling, said “be familiar with the tax consequences when considering debt settlement as an option. You don’t want to be blindsided by a costly IRS bill when you may already be struggling financially.”
What are the reasons that I received a 1099-C form in my mailbox?
According to the IRS, you would expect to see a 1099-C in your inbox if you have $600 debt or more that is canceled. “The bank is required to send this form because it is taxable income,” Smalley said.
Four common reasons.
You settled a debt for less than the amount what you originally owed, and the lender picked up the remaining balance.
2. Failure to pay debt:
You failed to pay on a debt for at least three years, and there was no collection activity.
Your home was foreclosed, and the difference between what you owed and the home value was forgiven.
4. Short sale Your home was sold in a short
Your home was sold in a short sale and your lender agrees to accept less than what was due.
If I filed for bankruptcy, do I have to fill out a 1099-C?
Smalley said that “if a debt is canceled because of bankruptcy, you do not have to pay tax on it.”
(Remember: Bankruptcy negatively affects your credit scores.)
Does receiving 1099-C mean that my debt is paid?
The answer to this question depends on why you received the 1099-C form. If you’ve received because you settled your debt, then yes, debt is resolved. If you’ve received because you haven’t made payments on your debt for three years (See point two above) and the debt collector has made no collection, then your debt isn’t yet resolved, and you may still owe.
What actions can I take if I received a 1099-C for a debt I already paid?
“First and foremost, contact the issuer of the 1099-C and ask them to make the necessary corrections,” McClary said. “They will need to send you a corrected 1099-C in time for you to file taxes.”
He further added, if contacting the issuer doesn’t work, “the IRS has a dispute process you can use. This requires that you reach out to the IRS and let them know you wish to submit a complaint about an incorrectly issued 1099-C. They will provide you with Form 4598 that you will have to attach to your tax return, along with any additional documentation that supports your claim.”
Do I have to file a 1099-C form in the same tax year I receive one?
The answer is YES. For more information and details, you can visit the IRS website for filling out and filing a 1099-C.
1099-C and statute of limitations
“There is no statute, as the form is to be issued in the year that the debt is canceled,” Smalley said.
Does 1099-C show the amount I’m paying taxes on or what I owe?
“It is the amount that you are paying taxes on,” Smalley said. “However, if you are insolvent, meaning you have more liabilities than assets, certain cancellations would not be taxable. You have to fill out another form, and you have to make sure that you have evidence to support that you are insolvent.”
Does 1099-C affect my credit?
The form itself won’t directly affect your credit scores. However, the behavior that leads you to receive the 1099-C might affect your credit. For instance, you didn’t pay your debt, and your name was recorded on debt collection list. Therefore, having an account in collections can negatively affect your credit.
To further understand, you can read this guide about how 1099-C can impact your credit.
Should you have questions about this tax form or any other financial assistance, please visit our website UnitedCounselors.org, or you can also contact us at 954-372-4370.