Q. I settled a debt in 2007 for less than owed, paying $15,000 on a $22,000 debt. I just today received a $7000 1099c for tax year 2007 from the creditor in the mail. Does this actually mean that I have to amend my tax return for 2007?

A. A 1099c is a tax form issued as a result of cancellation of debt. The amount of forgiven debt will count as income. According to the IRS regulations, a creditor has up to 3 years after the last ” collection activity” to issue a 1099c. You, of course, are responsible for paying taxes in the year in which that activity occurred. So, if the creditor stopped trying to collect 3 years ago, they can issue you a 1099c for 2005, on which you’ll not only owe taxes, but penalty and interest (16%). If they sell the debt to a junk debt buyer (JDB), then it becomes the JDB’s responsibility.

Some “debt fixers” claim that all you have to do is file for “insolvency” an the IRS will look the other way. The bad news is, you have to be insolvent at the time the 1099c is issued…not when the debt was “forgiven”.

If the amount of this debt was sizable, you might want to think about calling the creditor (the credit card company) and demanding your 1099c so you can get the tax accounting right.

Actually, the above situation is rare (lucky you for being so singled out)! Most of the time if you settle your debt with credit card companies, they will issue a 1099c right away. What is even more rare is a collection agency or JDB issuing a 1099c.

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