It is that time of year again, the time of year when a pile of tax related documents begin to show up in your mailbox. You may receive a W-2 form from your employer, charitable contribution statements to use for tax write-offs, and even mortgage interest statements if you are a home owner. However, there is another far less desirable tax form which will be finding its way into millions of people’s mailboxes this year as well – the 1099-C.
What Is a 1099-C?
According to the IRS, in certain circumstances applicable creditors must file a 1099-C form for “each debtor for whom [they] canceled $600 or more of a debt owed.” Sometimes this form will be sent to you as a result of a debt which you settled for less than originally owed. Other times a creditor may choose to voluntarily cancel your debt on their own. Either way, a 1099-C is probably not something you will be very excited to receive.
When you receive a 1099-C in the mail from a lender you are required to report the amount of your canceled debt to the IRS. The bad news is that the amount will be added to your total taxable income for the year, potentially making your tax obligation to the federal government higher.
Why Does the IRS Expect You to Pay Taxes?
When you settle a debt for less than you owe your credit is already taking a hit. Settlements, after all, can sometimes have a negative impact upon your credit scores. It can feel very unfair, therefore, to be expected to pay taxes on a debt which you could not afford to pay in the first place. Of course, the IRS sees things differently.
When you receive a loan from a lender you are not required to pay taxes on those funds. However, if you fail to pay back the loan or credit card debt according to the terms of your agreement and the debt (or some portion of the debt) is canceled you have now received additional “income” in the eyes of the IRS. The cancelation of the debt is a taxable event.
What If My Credit Reports Still Show a Balance?
It is always important to check your credit reports for errors and mistakes, but it is especially important to check your credit anytime you settle a debt or receive a 1099-C in the mail. When you receive a Form 1099-C one of the first actions you should take is to pull a copy of all 3 of your credit reports – a copy from Equifax, TransUnion, and Experian. Check the balances on the account with the canceled debt on each of your 3 reports. If the balance being reported is higher than $0 then you may have a big problem since the reported outstanding balance could potentially make it difficult for you to qualify for new loans and other extensions of credit.
You May Need Professional Help
If you have received a 1099-C in the mail for a canceled debt but the account is still showing a balance on your credit reports then the creditor in question could potentially be violating your rights under the Fair Credit Reporting Act (FCRA) by reporting inaccurate information about your debt to the credit bureaus. Of course you have the right to try to fight any credit reporting errors on your own, but sometimes hiring professionals to assist you just makes sense.
Unfortunately the issue of a canceled debt still showing a balance on your credit reports can be an extremely complicated problem. Even experts disagree over this issue and the IRS itself stated in an information letter that “The Internal Revenue Service does not view a Form 1099-C as an admission by the creditor that it has discharged the debt and can no longer pursue collection.” However, in at least one court case where a creditor tried to sue a borrower over an unpaid balance leftover after a foreclosure (a debt where a 1099-C was issued) the court ruled that the borrowers should not have to pay the previously canceled debt (IN RE REED).
Remember, you always have the right to ask for help when dealing with credit reporting inaccuracies occurring after a debt has been canceled or at any other time for that matter. You do not have to try to solve complicated credit problems on your own (though you certainly have the right to try). If you are struggling with credit problems of any kind, why not reach out to our credit pros for a free consultation? The relief you are looking for could be a simple phone call away.