Under current Office of the Comptroller of the Currency (OCC) rules, when principal balances on debts are forgiven, the banks must write off the amounts forgiven and report it to the IRS. For debtors, that means they may be hit with the double whammy of a tax burden while they are still trying to pay off their credit card debts via a debt settlement.
Any forgiven balance that exceeds $600 is taxable income. What does this mean in real dollars? Consider this: If your tax rate is 15%, $5,000 of forgiven debt will carry a $750 tax liability. That’s a debt that the Internal Revenue Service won’t forgive.
These rules apply to banks certainly, but what if you settle your debt with a collection agency? Can they issue a 1099-C on forgiven debt? OK – it’s time to offer my opinion on this, and I invite debate, but my answer is “no”.
Here is my reasoning:
- How do you know what the collection agency actually paid for the debt? They’ve paid pennies on the dollar for this debt. They’ve made money.
- Given the above, how is the “forgiven amount” calculated? Do you use the original amount of the debt with the credit card company or what the collection agency paid for it?
- The IRS specifically states that a 1099-C may not be issued in cases of identity theft: “Do not file Form 1099-C when fraudulent debt is canceled due to identity theft and the debtor is not liable for the debt. Form 1099-C is to be used only for cancellations of debts for which the debtor may be personally liable.“
- Given the fact that you can’t issue a 1099-C on disputed debts – how do you know that the person paying off the debt was actually the person who owed the debt? People pay off debt they don’t owe all the time. With the horrendous shape the collection agencies records typically are, it would be tough for them to prove ANY relationship between themselves and the original creditor.
Based on feedback I’ve gotten from readers and clients, collection agencies and JDBs rarely give out 1009-Cs. Given all the treading through legal murky waters that must be done after a debt settlement, this is most likely why there are relatively few 1099-Cs issued by collection agencies.
If you are issued a 1009-C from a collection agency, I would dispute the debt and protest loudly to the IRS and your state AG’s office.
Here’s a thread from our forums discussing how Portfolio Recovery Associates issued a 1009-C on a time barred debt. The reader complained to the Virginia Attorney General’s office and the IRS. Result: the 1009-C was voided. Nice work!
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The 1099-C requirement was imposed on debt buyers by the Internal Revenue Service, so your issue is with the IRS – not the debt buyers. The relevant regulations are in 26 C.F.R. Section 1.6050P-1.
If the debt buyer is erroneously or maliciously issuing a 1099-C, this could have a serious tax hit to the person who was settling the debt. There are many people who pay debts that aren’t theirs, they just want to end the hassle.
Only banks and Original Creditors are legally permitted to issue a 1099-c
“The 1099-C requirement was imposed on debt buyers by the Internal Revenue Service, so your issue is with the IRS – not the debt buyers. The relevant regulations are in 26 C.F.R. Section 1.6050P-”
Judy, I just read the regulation and I could not find anything about debt buyers.
My husband and I are currently working on settling a few debts. Does anyone have an idea on how to figure out how much we’ll owe in taxes when we receive the 1099-c’s?
If you were insolvent you dont have to pay taxes on forgiven debt
The IRS Publication that details the issues is 4681 (2009) Canceled Debts, foreclosures, Repossessions, and abandonments.
The form you file to document insolvency is Form 982
Additionally, I have seen 1099-c’s from original creditors (Capital One) which were dramatically less than the amount of the debt being collected by a collection agency (due to Cap One’s draconian interest rates and ownership techniques) It appears that the original creditor can only forgive debt that was real, not the thousands of dollars of fees and uncollected interest.
I just became aware of a 1099-C that was sent to me back in 2009. This week, I got a letter from the IRS stating that I owe an additional $745.00 in taxes for the year ending in 2009.
The information on the IRS letter states that the 1099-C was issued by “Travis Credit Union” when I called Travis CU they told me that they sold my account to a credit collection agency.
How would the collector’s know the fair market value of the car that I surrendered to the credit union? Also, like the author of this article states, how much did the collection agency pay for the debt?
If the S.O.L has ran out on a debt, can a collector still file a 1099c? Even if I haven’t made any type of payments to them? I’m starting to receive threats of this filing
Citi-Bank (Home Depot) told me the other day they sent me a 1099-C for 2010. I moved so much that I never got it. I haven’t heard from the IRS, but I’m sure I will. Is it true they can’t claim all the penalties and interest? Cause they did.
I also received a 1099-c that includes interest and penalties. My original credit limit on the card was something like $500 and the 1099-c is for more than $1700. I never paid the debt due to their shady finance charge practices in the first place. I would also like to know if it’s true they can’t claim interest.
I just received this past week a 1099 from capitol one bank for a debt that was written off at least 5 years ago perhaps more. how do I proceed with this, how can they say this is for 2011 when they did not write the debt off in 2011?