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1099c question...


txsquirrel
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Not sure if this is the correct section to post this, so here goes. I filed my 2007 tax return last week electronically and today I received a 1099C form from a creditor I settled with in 2006. I know that I have to report this as income, but do I need to somehow add it to the 2007 return I just sent off or can I save it until next year? I'm due a refund, if the IRS has record of this form, can they just take it out of my refund or do they add penalities.

I've scanned through several posts from others and know that I probably should just call the IRS themselves, but I thought I'd see what you guys had to say about it here.

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What you need to do depends on what tax year the 1099 hits.

If the 1099 is for any other year than 2008 (in which case you'll file it with your 2008 return) then you need to file an amended return; if you don't you'll wind up with an adjustment (eventually) plus a interest, fees, etc.

I would file the ammended return by USPS CMRRR and include a short letter explaining exactly when you receiced the 1099.

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I settled with a CA for less than the full amount. If the remaining amount is greater than $600, the CA files the 1099c for that amount. The govt, unfortunately, views that as income and you are taxed on it. Don't believe there is any around it. I think this is the same as if you had lotto or gambling winnings. But I could be wrong.

Thanks Robert. They have it dated as occuring in 2007, so I guess it would apply to the return I just filed.

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Definitely call the IRS just to make sure but you'll probably need to file a 1040X, amended tax return, for the year 2006, assuming that was the year the debt was forgiven. Unfortunately, as far as I know, they won't just take it out of your refund (although if they know you owe money, it *might* delay getting your refund, this I'm not sure, just a guess). File the 1040X, you'll probably owe an additional amount. Send that check in and I think the IRS will then mail back to you any interest and penalties you may owe for the additional tax. Give them a call though, they are usually fairly helpful.

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Ah, i see they sent it for tax year 2007. Definitely give them a call and tell them what happened since you just mailed your tax return. They may say to wait until its processed. The good news is you have until April 15 to file an amended tax return and you won't have any penalties or interest on this "extra" income.

You are right, there is no way to avoid it. Its seen as income, as a windfall, that you received. I guess its right, but the one thing I disagree with is that it includes INTEREST and penalties. IMO, you should just pay income taxes on the actual amount your borrowed, not on interest or penalties b/c these aren't tax deductible in the first place. But alas, that is not the case.

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Not certain, but I don't believe they included the fees etc in the amount. Ofcoarse the only thing I have to go by is the amount they put in the original suit against me. It is higher than what they included on the 1099. This was before I had any information on validation, so my actual numbers are fuzzy. At least its all over and done.

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Some where I read that the amount of the 1099C is the original amount of debt, without any fees or interest.

About how much tax would a person pay if the 1099C was $10,000?

No it's for the amount he received back, as the other poster advised he'll have to file and amended tax return, no big deal just did the same for my wife last year she wound up having to write a check for $86. That's the amount that would have been deducted from her original refund.

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While this hasn’t really been brought up here, a lot of people seem to think this is “unfair” or even an “IRS Scam” according to Bud Hibbs – it isn’t unfair or a scam.

This is an IRS rule that as existed for many, many years but hasn’t been enforced until fairly recently. The rule actually does make sense (as much as anything the IRS does makes sense).

If you take out a $10,000 loan you have absolutely no tax consequences because you are only borrowing the money and will, in theory, have to pay it back so rather than showing it as income in one year and a deduction in another (or several others), the proceeds form a loan is simply ignored.

However, when you take out a $10,000 and DON’T pay it back, then that $10K has now become income – you’ve been “enriched” by the transaction. If you pay back $5K of it and the other $5K is forgiven, then you’ve been enriched by the $5K.

I haven’t seen one of these 1099s personally but as I understand it, penalties/interest/fees, since they are never deductable anyway (except for a mortgage) have no tax consequences and should not be reflected on the 1099 as part of the “income”.

If anyone wants to be mad at someone, be made at the IRS; it’s their rule and they are the one’s enforcing it in the CA/JDB community but, IMHO, I actually do think the rule is fair (or at least reasonable).

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:confused: Huh.... Wheres the mention of scam or fairness.

No where...I guess you missed the first setence of my last post where I prefaced the post by saying...

While this hasn’t really been brought up here...

My last post was general...not intended specifically for you or specifially for anyone; just general information - the "1099" question gets raised a lot this time of year.

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There should be a time frame and a deadline for collectors to issue 1009Cs. It seems if the debt is out of SOL, that a 1099C couldn't be sent. Is there such a law?

If a person denies the debt and the collector hasn't prove it his, can a 1099C be issued.

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Actually, a 1099C can be Out of statute. Here's how....

Let's say the creditor issues a 1099C in 2008 for a debt charged off and cancelled in 2004. The taxpayer filed his 2004 return on time, by April 15, 2005. If the 1099C is issued after April 16, 2008 (three years from the later of teh filing date or the due date of the return) then the IRS is powerless to assess additional tax for the 1099C inder IRC 6501(a).

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I don't think it works that way (although bear in mind it's been quite a while since I had FIT classes).

I believe the "income" happens in the year in which the debt is actually forgiven by the debt holder - that can happen a long time (sometimes quite a few years) after the debt is written off.

However, if the debt holder is lazy in issuing the 1099 that might be a different story.

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Just a reminder to everyone about tax liability for a 1099c ---

--- you may be exempt from the taxation if you were insolvent immediately preceding the settlement that resulted in the forgiveness of debt. Insolvent is liabilities in excess of assets.

See IRS Form 982 for instructions and explanations. You can download the form from the IRS website -- just search on the form number.

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you may be exempt from the taxation if you were insolvent immediately preceding the settlement that resulted in the forgiveness of debt. Insolvent is liabilities in excess of assets.

I have read about this, but consider. I could have been considered insolvent before this debt was settled. I paid them off in March 2006, but the 1099 they sent me they dated it as being settled March 2007. So I would either have to contact the creditor and convince them to change the date on the 1099, but wouldn't that penalize me with whatever fines the IRS has because I didn't file this last year? Probably just easier to let it go and pay the income.

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Actually, a 1099C can be Out of statute. Here's how....

Let's say the creditor issues a 1099C in 2008 for a debt charged off and cancelled in 2004. The taxpayer filed his 2004 return on time, by April 15, 2005. If the 1099C is issued after April 16, 2008 (three years from the later of teh filing date or the due date of the return) then the IRS is powerless to assess additional tax for the 1099C inder IRC 6501(a).

How, or where, do you find the date of the debt cancellation? Is it always when the debt is charged off?

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How, or where, do you find the date of the debt cancellation? Is it always when the debt is charged off?

I'd say it woulr be rare for it to be the date the debt is written off.

Writing off a debt is simply an accounting entry required by federal and/or SEC and or GAP rules and has no bearing on the existance of the debt or whether it can, eventually be collected or not - depending on how the debt originated and the state involved, a creditor (be it the original creditor or a subsequent debt buyer) can try to collect for years.

Only when the current debt owner decides it will NEVER collect the debt and ceases all collection activity forever is the debt "forgiven" and a possible taxable event triggered. This often happens when a negotiated settlement is reached where the debtor/creditor reach a settlement for less than the amount that is legally owed; the difference between what is legally owed and what is actually collected is the "forgiven" amount and the amount why the 1099 is issued.

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