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1099-C INFO FROM ABC NEWS

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This information comes from ABC NEWS. I think you may find the answer to your questions if you read it all:

 

Column by Gerri Detweiler at Credit.com

February 28, 2012

 

It's perhaps the biggest tax mess of 2012: An estimated 6.3 million 1099-C forms reporting cancellation of debt income have gone out to taxpayers. Some of those forms are being sent to consumers for very old debts that they never thought they would hear about again.

 

To make the situation worse, the IRS is arguably providing inadequate guidance to taxpayers, and even tax professionals have different opinions about how to deal with them.

 

Why now? Why would creditors suddenly be sending out these forms for ancient debts? "There are all these new 1099 reporting requirements coming out this year," says Kay Bell, contributing tax editor for Bankrate.com and author of The Truth About Paying Fewer Taxes. There is a push by the IRS to "get more information to get people to pay what they owe regardless of the source."

 

Here are a just a few comments and questions we've received in response to stories on this topic at Credit.com:

An estimated 6.3 million 1099-C forms reporting cancellation of debt income have gone out to taxpayers.

 

I just received a 1099-C from Bank of America. I do not remember the debt, but I have had no dealings with them for more than six years. The statute of limitations on credit card debt in Florida is 4 years. Is there a time frame within which the banking institution has to "forgive" a debt, and a time limitation on when they may file a 1099-C with IRS?

 

—John

 

I have received three 1099-Cs from a debt collector (Asset Acceptance). I do not recall getting any mail from this company and they are not on my credit reports. I have read a lot of conflicting advice about whether or not this is even a legitimate 1099-C since they are a junk debt buyer. —Charlotte

I'm glad I found this article! I received a 1099-C today for an old credit card debt which dates back to 2001. This date is way past my state's statute of limitations which until last year (4/11) was 3 years but was changed to 6 years. The debt is uncollectible and unreportable so how can they forgive something they have no right to collect?

 

—Nancy

"If ever the term "blast from the past" were applicable to a section of tax law, the provisions for cancellation of debts would rank near the top," says Phil Sepp, Executive Vice President of the National Taxpayer's Union. "Taxpayers can receive some nasty tax surprises from this area of law, some of them dating back quite some time. Also, this area of tax law is among the most complex for individuals and their preparers, definitely in league with the Alternative Minimum Tax and the latest investment income reporting requirements."

 

The National Taxpayer Advocate, the independent advocacy arm of the IRS, has noted that 1099-Cs for Cancellation of Debt Income (CODI) can be a burden to taxpayers, stating in a report to Congress that "creditors sometimes make errors on the form that debtors then may have to wage an uphill battle to correct."

It can be a minefield, agrees Jennifer MacMillan, an enrolled agent and member of the National Association of Enrolled Agents. "There are so many reasons why a 1099-C can be wrong."

 

When Are Lenders Supposed to Send 1099-C Forms?

 

Page 2 of 4

 

February 28, 2012

 

I just received a 1099-C for a relatively small amount, from Capitol One. My credit has been excellent for years, so I called them to find out where this came from. It turns out it was from a credit card I had in 1986, and which was charged off in 1989. But the official debt forgiveness date is 12/31/2011. I haven't had contact with Capitol One, of any kind, in decades. My question is: isn't there a statute of limitations on these "forgiveness" shenanigans?

 

—Jim

In the 2012 instructions for Form 1099-C that the IRS provides as guidance to creditors, it states:

"A debt is deemed canceled on the date an identifiable event occurs or, if earlier, the date of the actual discharge if you choose to file Form 1099-C for the year of cancellation." In addition to the discharge of a debt in bankruptcy, one of the identifiable events is:

 

"A cancellation or extinguishment when the statute of limitations for collecting the debt expires, or when the statutory period for filing claim or beginning a deficiency judgment proceeding expire."

 

So far, so good. It sounds like the 1099-C should be filed if the statute of limitations for the debt has run out. (The statute of limitations is a matter of state law, and varies depending on the type of debt.)

 

But wait. The IRS then throws in this caveat:

 

"Expiration of the statute of limitations is an identifiable event only when a debtor's affirmative statute of limitations defense is upheld in a final judgment or decision of a court and the appeal period has expired."

 

So it appears the statute of limitations only comes into play if the debtor has been sued for the debt, raised the statute of limitations as a defense against the collection of the debt, and the creditor did not appeal the decision.

 

The IRS then describes another identifiable event: "A discharge of indebtedness because of a decision or a policy of the creditor to discontinue collection activity and cancel the debt. A creditor's defined policy can be in writing or an established business practice of the creditor. A creditor's established practice to stop collection activity and abandon a debt when a particular nonpayment period expires is a defined policy."

 

This is of no help to taxpayers, of course, because they would have no way of knowing what the creditors' policies are. So let's move on to another one:

"The expiration of non-payment testing period… This event occurs when the creditor has not received a payment on the debt during the testing period. The testing period is a 36-month period ending on December 31, plus any time when the creditor was precluded from collection activity by a stay in bankruptcy or similar bar under state or local law."

 

Bingo! If none of the other triggers for sending a 1099-C apply, it sounds like the creditor must send one out three years after there has been no payment made on the debt for three years.

 

But not so fast. The IRS adds another caveat to this one as well:

 

Page 3 of 4

 

February 28, 2012

 

"The creditor can rebut the occurrence of this identifiable event if: 1. The creditor (or a third party collection agency on behalf of the creditor) has engaged in significant bona fide collection activity during the 12-month period ending on December 31, or 2. Facts and circumstances that exist on January 31 following the end of the 36-month period indicate that the debt was not canceled. Significant bona fide collection activity does not include nominal ministerial collection action, such as an automated mailing. Facts and circumstances indicating that a debt was not canceled include the existence of a lien relating to the debt (up to the value of the security) or the sale or packaging for sale of the debt by the creditor."

 

So now the IRS seems to be indicating that if the creditor packaged the debt for sale, the requirement to send the 1099-C after 36 months of non-payment does not apply. Again, though, this is of little help to taxpayers. How will they know if that occurred, much less challenge it?

 

Taxpayers Want Answers: Good Luck With That In researching this story, I queried the IRS multiple times with no response. I also reached out to the Senate Finance Committee, under whose jurisdiction the IRS falls, and attempted to reach the Taxpayer Advocate, which has written about this issue in reports to Congress. I received no reply from any of these agencies.

 

I also reached out to a number of tax professionals with varying degrees of success. Some gave conflicting advice while others felt the IRS has not provided adequate guidance to taxpayers on this specific issue. Most tax advisors encouraged taxpayers to get professional advice if they have received a 1099-C for an old debt. While I agree wholeheartedly, it is troubling that the taxpayers who would most need professional assistance to navigate this complex issue are the ones who may be least able to afford it. After all, financial difficulties are what led to them getting a 1099-C in the first place. Indeed, a few Credit.com commenters told us that they don't normally have to file tax returns due to their limited incomes, and can't afford professional advice.

 

 

Your Options If You Get a 1099-C For An Old Debt

 

My husband had a car repo in 2002 from Toyota. Last year (7 to 8 years later) we got a 1099 from Toyota saying they settled out debt for $3498.00. It was a weird looking letter and statement so I thought it was a sales gimmick and disregarded it. Now I have a letter from the IRS saying we own $480.00 from this debt cancellation. Can this be done? —Laura The consensus amount tax professionals I spoke with for this story seems to be that the taxpayer who receives one of these forms should first try to find out if he or she can avoid paying taxes on cancellation of debt income (CODI) by qualifying for an exclusion or exception, such as the exclusions for debts discharged in bankruptcy or due to insolvency. I discussed these in more detail in my first article, 1099-C In the Mail? How to Avoid Taxes on Cancelled Debt. If you qualify to exclude that income from your taxable income for the year, you may find it easiest to file Form 982 with your tax return and be done with it. [Related Article: More Confusion Over the 1099-C]

 

Page 4 of 4

 

February 28, 2012

 

But what about someone who receives a 1099-C for a debt that is years—or decades—old? While they may have been insolvent by IRS standards at the time the debt was forgiven, their financial situation may be much different now, and income reported on a 1099-C could mean a big tax bill. Do they have any options?

 

When I asked Rob Deines and Tony Palizzi, tax associates with ProVision PLC, about a taxpayer who received a 1099-C for a debt that was written off two decades ago, their view was that the creditor was wrong in sending it so late. "They don't get to choose when they send the 1099-C," says Deines. "If they haven't tried to collect that debt in 10 or 20 years, then they are severely delinquent (in filing Form 1099-C)."

 

While you can dispute the 1099-C with the creditor that issued it, don't be surprised if they don't fix it. "You probably won't be successful in getting a corrected 1099-C," says Phillip P. Guttilla, shareholder with Polsinelli Shughart PC. "You'd have to dispute the 1099 (with the IRS). " He adds: In tax audits, the IRS and taxpayer will often disagree over when cancellation of a debt occurred. The taxpayer may argue that cancellation of a debt occurred in a year on which the statute of limitations for assessment of additional tax has run and the IRS will take the position that the debt was discharged in a year that is still open to audit. A taxpayer recently won a case with the IRS over the timing of the discharge of debt.

 

It appears the IRS expects that taxpayers may have questions or disputes with the creditors about these forms. In the instructions, it states: "The creditor's phone number must be provided in the creditor's information box. It should be a central number for all canceled debts at which a person may be reached who will insure the debtor is connected with the correct department." (It's too bad the IRS doesn't publish a dedicated IRS phone number for taxpayers who have questions about this issue!) https://turbotax.intuit.com/login/lp/ty11/bn/neauthfr.jsp?priorityCode=3468341816&cid=all_cjtto-1466410_int_3468341816&PID=1466410

 

A Loophole Perhaps? If You're Brave Enough If a taxpayer claims a 1099-C should have been issued years before, will the taxpayer then be required to file an amended tax return for the year in which the 1099-C should have been issued? Not necessarily, says Deines. The statute of limitations for the IRS to assess the tax generally expires 3 years after you filed your return. However, there is no statute of limitations for assessing and collecting tax if no return has been filed.

Dienes and Palizzi warned that there is no guarantee this approach—claiming that you don't have to pay taxes on COD income that should have been reported years ago—will work. It is certainly advisable to work with a tax professional.

 

Whether taxpayers who have already struggled with paying their debts will want to wrangle with the IRS on this issue remains to be seen. "No one really knows how aggressive the IRS is going to be," warns Gutilla. "Get good advice and make sure you follow the rules. If you get caught, you may end up paying taxes and penalties."

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As a Tax Professional and an Enrolled Agent I always take the 1099C back to the date the debt should have been cancelled using the Statute of Limitations where possible and then construct a Balance Sheet for the client as of that date to substantiate the continued Insolvency exemption. I attach an explanatory note to the return explaining why I am doing it that way.

 

The important thing is to address the issue in a tax return, take the position that you believe the facts and circumstances justifies and wait to see if the IRS audits. If you don't address the 1099C on the tax return, the audit is automatic through the CP-2000 Document matching letter. If you DO address the issue then it is up to the IRS to decide to actually audit. In 30 years of tax practice I have never heard even a rumor of the IRS actually auditing this issue.

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As a Tax Professional and an Enrolled Agent I always take the 1099C back to the date the debt should have been cancelled using the Statute of Limitations where possible and then construct a Balance Sheet for the client as of that date to substantiate the continued Insolvency exemption. I attach an explanatory note to the return explaining why I am doing it that way.

How is that done for the case where the taxpayer to whom the 1099C was issued did not owe the debt in the first place?  I know the IRS says these are to be issued only to the party who owe the debt, and not for debts disputed as not owed.

 

The important thing is to address the issue in a tax return, take the position that you believe the facts and circumstances justifies and wait to see if the IRS audits. If you don't address the 1099C on the tax return, the audit is automatic through the CP-2000 Document matching letter. If you DO address the issue then it is up to the IRS to decide to actually audit. In 30 years of tax practice I have never heard even a rumor of the IRS actually auditing this issue.

How is that done (address the issue in a tax return)?  Is there a specific form to attach to dispute a 1099C as in error by whatever kind of error it is (wrong amount, wrong person, fraudulent debt, etc)?

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Form 8275 or Form 8275-R is what you use to disclose the position you are taking. Form 8275 is for those who are taking a position based on IRS rules, Form 8275-R is what is used to disclose a position contrary to IRS rules. You will have to know the exact rule that applies to your position. I would send a copy of the 1099-C with the form.

What Flying is saying is by filing this form, you force the IRS to decide if it is worth the tax amount to fight your position because now it will cost them money. If you simply ignore the 1099-C, they can do an audit via mail/letter and that is very cheap. If you file the above form, the IRS now has to put in a human auditor (and probably one with some experience). An experienced auditor costs the IRS $100 - $180/hour. This does not include the fact that you might fight this in tax court. Since most of the debts are under $10,000, this means that once they spent $1500 - $2500, they are losing money fighting you.

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How is that done for the case where the taxpayer to whom the 1099C was issued did not owe the debt in the first place?  I know the IRS says these are to be issued only to the party who owe the debt, and not for debts disputed as not owed.

 

How is that done (address the issue in a tax return)?  Is there a specific form to attach to dispute a 1099C as in error by whatever kind of error it is (wrong amount, wrong person, fraudulent debt, etc)?

When there is no form that addresses the topic, you simply attach a piece of paper stating the facts and the form you were issued. In this case I would make a copy of the 1099C a the top of the page and state elsewhere on the page that this is not being included in income for the following reasons (and list them - "I never owed money to this creditor or its successor" or "A Judge has ruled that there never was such a debt" or any other reason), then attach any documentation, like a Judicial ruling, that you may have.

 

In this instance I advise against e-filing the return - send a paper return with this attached and CMRRR it. That way they can't claim they never got it.

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No, DO NOT USE 8275!!! That form is used when you believe the IRS interpretation of the LAW is wrong and you are asking (actually demanding) that you and the IRS go to Court to litigate what the law is. In these instances it is not an issue of the IRS misinterpreting the law, it is a matter of fact that is at dispute.

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In this instance I advise against e-filing the return - send a paper return with this attached and CMRRR it. That way they can't claim they never got it.

 

I never e-file.  That puts the clear contents of the filing in someone else's "hands" (computer).  I still send them a PRINTED copy by USPS on the principle that, whether free or not to e-file, it is a matter between me and the IRS and no one else.

 

I would never send the IRS an electronic copy unless I can verify that only the IRS can read it (or THEY have delegated the ability to read it to someone else, instead of me delegating it).  That would mean encrypting the return contents using their PUBLIC key of a public/private key system (e.g. only the holder of the corresponding PRIVATE key can decrypt it).

 

And I will avoid the 8275.  Thanks!

 

If the JDB that threatened to send a 1099C if I didn't pay in full this debt they claim comes from an OC they named that I have never done business with, does send it, I'm thinking that what I will do is sue them ... not for the taxes involved ... but for the forgiven value (plus attorney fees, of course).  My theory is that they decided to give me money, but placed it in the wrong account.  I should have my income if I am going to have it on my tax record as income.  Hopefully they won't want to fight it and will send a corrected 1099C.

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As a tax pro who has been e-filing since 1986 I can say that I have never had a problem with it, security-wise or otherwise. When you e-file the IRS sends an Acknowledgement which is your proof of filing. Printi it and save it. If they ever say they never got the return just pull out the Acknowledgement and watch them eat crow.

 

Actually, your fears about e-file security are pretty well understandable but at the same time unfounded. My e-files do go through my software company but a breach of security on their part for the few hours they have the file would put them out of business because the IRS woild revoke their efile permits and all professional preparers would stop using their software. An e-filed return IS encrypted automatically by the tax software before it is sent.

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As a tax pro who has been e-filing since 1986 I can say that I have never had a problem with it, security-wise or otherwise. When you e-file the IRS sends an Acknowledgement which is your proof of filing. Printi it and save it. If they ever say they never got the return just pull out the Acknowledgement and watch them eat crow.

 

Actually, your fears about e-file security are pretty well understandable but at the same time unfounded. My e-files do go through my software company but a breach of security on their part for the few hours they have the file would put them out of business because the IRS woild revoke their efile permits and all professional preparers would stop using their software. An e-filed return IS encrypted automatically by the tax software before it is sent.

 

Having worked in an IT network security role at a tax software and processing company, I know what risks they face.  And that work is a factor in the position I have established, although not a predominant one.  It's not so much about whether they could be hacked into, but rather, my general default lack of trust of all corporations (they must actively earn that trust).  I don't mind having my money in a corporate bank.  In fact I have it in 4 different banks ... because I don't trust any of them.  But all they know about me is what I put in there and my transactions involving those accounts.  They don't have a wide breadth of knowledge about me.

 

But the bulk of my reason is the principle that the government should not demand that I do business with particular businesses just to meet my obligations with the government.  I don't do my banking by letting a third company handle it for me.  I go to the bank directly.

 

BTW, the encryption in the software is NOT using the IRS keys.

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Torden - if that is truly the way you feel then don't e-file at all - send in a paper return. It is your right to do so. Even if you do the return yourself, the major players in the self-prepared return e-filing business also sell Professional versions of their software (Turbo Tax and Tax Act). With either of them you will not be filing direct to the IRS and State but through them.

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I do my returns myself, without software ... other than a PDF reader that lets me fill in the numbers.  Then I print 3 copies, sending them a signed one.

 

So far the JDB that threatened a 1099C on a debt that is not mine has not delivered on it.  They know I know their service address.

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I wouldn't mind reciving a 1099c from an old debt, my real question is if they "forgive" the debt, how is possible they can continue collection activities? is stupid you pay taxes on a old forgiven debt and then the JDB can keep haunting you. Dosen't make sense.

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I wouldn't mind reciving a 1099c from an old debt, my real question is if they "forgive" the debt, how is possible they can continue collection activities? is stupid you pay taxes on a old forgiven debt and then the JDB can keep haunting you. Dosen't make sense.

They donj't actually forgive the debt.  They only follow the IRS rules as to when a 1099c must be issued.  There have been several civil court cases waffling back and forth on this, but I don't beleive there has been a tax court decesion.   Technically, they can still try to collect (even if the reason for the 1099c was you got a judge to agree the SOL had expired, which triggers a 1099c).

 

And...yes...the IRS doesn't make sense.  They don't have to...their phone jerks can tell you a completely inaccurate statement, and you're still responsible for the consequences.

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Hopefully all this 1099c stupidity get's cleared out soon. At the least if a 1099c is issued the debt should be really forgiven, and could not be resold, etc. if nto you might end with several 1099c from the same debt over the years, which does not make sense either.

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Good article - definitely worth reading and at the same time it sends shivers down my spine.  What a mess.  

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For one thing, the IRS would probably like to know that your debt was forgiven by the original creditor and not the collection agency.  

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This article makes me cringe because I currently have two accounts on my credit report that aren't mine but TNB and BofA keep verifying as mine.  Both were supposedly charged off in 2009 and one was marked as written off by TNB this year.  I will be beyond pissed if I get a 1099-C for someone else's mistake.  Going to call my lawyer this morning about this.

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A follow up question on 1099-C's. After receiving this form, what is a bank's credit bureau reporting requirements on a credit card debt? Is it proper to issue the 1099-C and still report the debt as being owed in full? (even if the form states "Cancellation of Debt")

 

I am trying to reconcile a 1099-C / credit bureau reporting issue over a closed commercial credit card account, where the bank issued the 1099 -C to a dissolved corporation of mine. They still report the debt as owed in full on my credit bureau reports.  I'm also wondering if the credit bureaus have taken a position on this.

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@Determined1 I don't have a definite answer for you, but here are some things to consider:

 

If you personally guaranteed the "commercial" account, the creditor is within their rights to report it on your personal credit reports.  I think there have been court rulings both for and against this, so that issue isn't fully resolved.

 

Issuing a 1099c does NOT mean the debt is canceled.  It only means the creditor is obeying the IRS rules regarding when a 1099c must be issued.  Usually, that means they haven't actively tried to collect it for 3 yrs, but there may be other "triggers".

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Thanks for your feedback @willingtocope. The account I am disputing was not personally guaranteed by me. The bank also admitted by phone that they have no proof to show that it was. The 1099-C was issued to my former corporation, not me personally. My main concern at this point, 4 years after they claim the last payment was made, is credit reporting.

 

I have a different position on 1099-C's than you stated. While I know there are examples of banks suing after a 1099-C has been issued, I believe it is a rarity to occur. It's also rather incongruous for a bank to issue a tax form that is stamped in bold letters "CANCELLATION OF DEBT" and then try to claim the debt was not cancelled (I know I'm asking a bank to be honest and straightforward here...).

 

My situation also has additional detail I did not provide in my previous post. In addition to the 1099-C, the bank has sent me a letter declaring they believe there was a debt and the amount, but they are not seeking collection of this alleged debt. So my issue is the credit reporting. I've tried multiple disputes with the credit bureaus over the past year, and the bank routinely verifies the debt, updates this monthly, and reports to the credit bureau that entire amount is presently owed. 

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Well, again, "CANCELATION OF DEBT" is for IRS purposes...which unfortuneatly is different than credit reporting purposes.  Probably, the good news is, if the 1099c was issued to the corp...YOU don't owe the tax...the corp does.

 

To get this off your reports, I think you're probably going to have to sue under the FCRA for reporting incorrect information.

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Well usually when a debt is paid off with the creditor or JDB they issue a 1099  and you have to report it as income - So now while this new situation does not cancel the debt  or remove from credit (I got a l1099 letter from major bank on one of my collection accounts) , but makes you pay taxes on debt on your credit report that you owe but cant pay?

 

I thought that once you are told by creditor that the debt is not being collected anymore or being sold  and it is a charge off and write off, so they have the right to keep the balance showing as what you owe on your credit or are they supposed to revert it back to zero- paid off?

I think what I also meant to say that is the OC has not sold the debt and writes if off and is issuing a 1099 do they have to report the balance as zero?

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