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Tax question on C/O debt


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I just got a letter from a CA and although I am not sure what prompted it, they did bring up a good point.

It is a letter from the Westmoreland Agency stating Crap1 bought an old account of mine from BofA with a C/O balance of $910. The account was charged off in 3/1995. First, I don't remember ever having such an account, but that doesn't matter. It is well out of SOL and is well beyond the reporting period. I fully intend on just sending a C&D.

The problem is that they are telling me that if I don't pay them at least $360, Crap1 will file a 1099-C because they will have forgiven more than $600 in debt which must be counted as income.

Now I know about the whole 1099-C thing, but isn't there some kind of SOL on how far back the IRS can go with this? It seems to me that if they charged it off 10 years ago and I am only required to keep tax records for 7 years that I wouldn't be able to defend myself against the new taxes. So some company can come by 10 or more years later and cause me to pay more taxes for some debt they can no longer even prove?

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Well, here's a link to the IRS regs regarding 1099c

http://www.irs.gov/instructions/i1099ac/ar02.html#d0e116

If I understand the gibberish correctly, the section about "When Is a Debt Canceled" implies that if they didn't charge it off using their normal business procedures then its subject to the SOL. Basically says, if they were going to send you a 1099c, they should have done it years ago.

Perhaps you have a suit against both the CA and the OC for "overshadowing" and maybe even failure to report...

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I don't think I'd worry too much about the IRS. Since the debt is no longer owned by BofA and therefore Crap1 is a JDB, I don't think they can "forgive" anything more than they paid for it...which has got to be well below the $600 reporting limit.

The CA probably just sent you a form letter without even looking at the amount of the debt. I'd tell them to be gone, or the next time they hear from you will be in court...

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I think the 1099C is the next collection method some agencies are using. "we'll send you a 1099 and tip you off to the IRS, you'll get audited every year, blah, blah, blah."

I think the premise if the 1099 is that the debt has to be valid, so if you dispute the debt with the IRS as not yours, then they would have to offer some sort of validation. I just don't know how savvy IRS types are on credit and credit reporting, but they probably aren't very smart of the stuff.

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First of all, JDB's and CA's can NOT issue 1099-C's for anything ! They do NOT fall under ANY of the specified categories of those that can issue 1099's. Apparently there is legislation floating around that will REQUIRE CA's to issue 1099's on SETTLED DEBTS only.

Crap1 is acting as a debt collector/JDB since they bought a defaulted account. Crap1 didn't charge-off the debt, the ORIGINAL CREDITOR did and if THEY didn't issue a 1099-C, then Crap1 sure as hell can't.

Even IF they did/could, it still may not be reportable as income. If you can prove insolvency at the time the debt was 'forgiven', then the 1099-C amount does NOT have to be reported as income.

(a)

Exclusion from gross income

(1)

In general

Gross income does not include any amount which (but for this subsection) would be includible in gross income by reason of the discharge (in whole or in part) of indebtedness of the taxpayer if -

(A)

the discharge occurs in a title 11 case,

(B)

the discharge occurs when the taxpayer is insolvent,

(3)

Insolvency exclusion limited to amount of insolvency

In the case of a discharge to which paragraph (1)(B) applies, the amount excluded under paragraph (1)(B) shall not exceed the amount by which the taxpayer is insolvent.

Insolvent

For purposes of this section, the term ''insolvent'' means the excess of liabilities over the fair market value of assets. With respect to any discharge, whether or not the taxpayer is insolvent, and the amount by which the taxpayer is insolvent, shall be determined on the basis of the taxpayer's assets and liabilities immediately before the discharge.

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That is the problem. The supposed account here was for a debt charged off in March 1995. I know I didn't have any accounts or CC's in 1995. I had NO credit of any kind from when I got out of the military in Oct of 1992 until a year after I moved to Florida. That would mean no credit until Feb 1995.

That means if it really was mine, it was credit I had that was pre-1993, but I have no information on anything that old.

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Update- I called BofA recovery department today and gave them the account number on the letter. No record.

They tried to look it up by my SSN. All that was there was my current BofA card. (opened 2002)

Called BofA collections department. Same story. No record.

I looked up the CA. Westmoreland Agency. Owned and operated by Crap1.

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The letter is deceptive. You sue them for that, as they are threatening you with action they cannot legally take.

Crap 1 may have written the account off as a bad business debt, but the fact they are hounding you means they have not " cancelled" or "forgiven" you the debt. Here is what the IRS in one of its publications says:

"Canceled Debts

Generally, if a debt you owe is canceled or forgiven, other than as a gift or bequest, you must include the canceled amount in your income. You have no income from the canceled debt if it is intended as a gift to you. A debt includes any indebtedness for which you are liable or which attaches to property you hold.

If the debt is a nonbusiness debt, report the canceled amount on Form 1040, line 21. If it is a business debt, report the amount on Schedule C or Schedule C-EZ (Form 1040) (or on Schedule F (Form 1040), Profit or Loss From Farming, if the debt is farm debt and you are a farmer).

Form 1099-C. If a Federal Government agency, financial institution, or credit union cancels or forgives a debt you owe of $600 or more, you will receive a Form 1099-C, Cancellation of Debt. The amount of the canceled debt is shown in box 2. "

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Form 1099-C. If a Federal Government agency, financial institution, or credit union cancels or forgives a debt you owe of $600 or more, you will receive a Form 1099-C, Cancellation of Debt. The amount of the canceled debt is shown in box 2. "

so if they're representing themselves as a CA, then they can't file a 1099-C anyway? what's the definition of 'financial institution' as used here? is it just banks?

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See that is how they are threatening me. They are saying that if I refuse to pay, they are going to turn this into a tax matter by filing the 1099-C.

My point is that this isn't their debt to forgive. By charging off this debt over 10 years ago and not attempting to collect, the OC abandoned the debt already. How can someone else come along and declare this to be a current forgiveness for which I owe taxes, when they haven't even proven it to be mine to start with? The SOL for tax assessment is three years. The only way for them to get me for taxes is to claim this is a current debt.

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