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Can a Collection Agency Issue a 1099-C for Settled Debt?

July 13th, 2009 · 17 Comments · Collection Agencies

by Kristy Welsh

(Last Updated On: June 25, 2013)

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:

  1. 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.
  2. 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?
  3. 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.
  4. 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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17 Comments so far ↓

  • Judy

    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.

  • Kristy

    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.

  • cookzana

    Only banks and Original Creditors are legally permitted to issue a 1099-c

  • maureen

    “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.

  • Jillian

    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?

  • jimmy

    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

  • jimmy

    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.

  • John

    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?

  • Scott

    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

  • Derek

    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.

  • Sara

    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.

  • michelle

    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?

  • Mr, B.

    Recently, several collection companies, mostly so-called “Debt Buyers” have been accused of illegally issuing 1099c forms as part of a scam to prop up their balance sheets and/or claim huge write-offs to which they are not rightfully entitled. Among these were Portfolio Recovery Associates of Norfolk, VA. And Asset Acceptance Corporation, by nearly all accounts, two of the most disreputable vomit stains ever to soil the world of finance. It is recommended by consumer advocates than ANYONE receiving such a form from any debt collector consult a tax professional and possibly a lawyer as you may have grounds to sue the collector for a tidy sum, or at least get the liability off your taxes while getting them in big trouble with the IRS. Most of these scams involve very old, long-expired accounts, including some even discharged on bankruptcy, or never owed by the recipient in the first place. Remember, there is no such thing as an honest bill collector, so don’t take their word for anything!

  • G

    If the bank sold the Debt to collection agency then they no longer own the debt, correct? The banks can’t have their cake and eat it to. Oh’ i’m sorry yes they can the dems. are making sure of that. Notice who’s in office when this started happening. The Dems have allowed the wall St. Bankers free reign over the average Joe. They scamper into their offices & hide from the light of truth. When someone even challanges them they arepersonally attacked. Their only reply is to say Look at what the replublicans did. #1 Not a answer. #2 most conservitives aren’t republucans, they are more on the progressive is with the dems. their only in the GOP by name their the worst of the worst policicans. but, at least we will remove a scumbag, the Dems. promote the scumbags. the government is getting how much money if they issue you a 1099-c? yea, that’s right just another avenue of revenue for the Dems. to soak up by proxy. they will keep on & on until they are getting 100% of our earnings. the average guy’s income has been hit by a nucluer bomb. Obama has created such a tax vacuam on the average Joe but he’s done it all by using a middleman to keep his hands clean. The gov. now controls 74% of the us economy. Welcome to Communism komrad.

  • JR

    I settled a charged off Bank of America account from 2009 in 2012 with Asset Acceptance. I settled for 20% of the balance. I just got a 1099-C for $6,000 from Asset which they sent to the IRS.
    I highly doubt that Asset paid BOA full price for the debt and probably made a profit off this debt. I would like to dispute this asap as I am expecting a refund from the IRS. I would be grateful for advice on how to proceed. Thank you

  • KND

    I was paying on a credit card debt since 2004 that was closed by the Providian Bank in 2002 even though I was on time every month. I paid like clockwork. December 2012 the last collection agency was told by Card Services to claim it as fulfilled. The original debt was $4125 and the write off settlement was $1658. I would have kept on paying the debt but they AGAIN closed it on me. I paid every month and I increased my payments voluntarily because I had budgeted it and wanted to pay it off. I feel cheated because I was going to increase my monthly payments so it would have been paid off quicker.

    What solutions do I have? I can’t pay any additional taxes on this. This is an 11 yr old Debt.

  • Kristy Welsh

    I would follow the advice of several of our posters that suggested talking to a tax professional and hiring a lawyer to take this matter to court. The state AG’s office should also be consulted.

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