The football season officially ended with the Super Bowl last night in the first overtime game in Super Bowl history. Now the season that no one wants to come is here. Tax return season. There is one tax preparer now advertising filing your returns and getting your taxes won. An interesting catch phrase for sure, but what is most important is getting the tax return done correctly. Every year our firm gets asked the question about receiving a 1099-C form from a creditor and what to do about it. The Internal Revenue Service is driven by the use of forms so keep in mind that you must file the correct form or forms in response.
Received 1099-C From a Creditor
What do you do if you have received a 1099-C from a creditor? This form means that the creditor has cancelled a debt that was owed to it and the tax code requires that this be reported to the IRS. The reason is that the cancellation or forgiven debt may be considered income that you are required to report. Although that may not seem fair it is the law at present.
What if you have received a discharge in a chapter 7 bankruptcy or a chapter 13 debt reorganization plan with regard to this debt? Let me premise this explanation by saying that I am not an accountant and everyone’s situation is different. If you are uncertain as to your situation, you should consult with a qualified tax professional. First, look at box #6 on the form 1099-C. The identifiable event code is hopefully marked with the letter A. This identifies the debt as being included in a bankruptcy case. The next step is to fill out a Form 982 (Reduction of Tax Attributes Due to Discharge of Indebtedness) and attach the same to your tax return. You should mark the box on line 1a since your debt has been discharged in a title 11 case (title 11 for simplicity purposes mean a bankruptcy case). Next, enter the amount shown on the 1099-C on line 2. For example, the credit card company sent you a 1099-C with an amount of $10,000 shown as forgiven. You would then enter $10,000 on line 2 because this is amount of the credit card debt that was listed and discharged in your bankruptcy case and is therefore not included as income.
As you can see it is pretty simple and just requires that you file the proper form in response to what the creditor sent to you and the IRS. Please do not disregard this 1099-C form as a copy is sent to the IRS. If you do not fill out the Form 982, it is very possible the IRS could, at some later date, send you a letter stating that you have under reported your income for that year and now you owe a tax debt. It is much more difficult and time consuming to deal with this after the tax return is filed.
If you are dealing with tax debt or any other debt that seems overwhelming, facing a foreclosure, garnishment, repossession, lawsuits, or collections, please contact the professionals at Bond and Botes. We have been helping good people through bad time for more than 20 years. We offer a free initial consultation with a licensed, and most importantly, experienced attorney.
* Bond & Botes, P.C. and its affiliates do not provide tax or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax or accounting advice. You should consult your own tax and accounting advisors before engaging in any transaction.