You may be off the hook with the recent cancellation of a debt, but don’t forget to report it to the IRS with Form 1099-C!
What is an IRS 1099-C?
According to the IRS, when any debt you owe that is canceled, forgiven or discharged, that counts as taxable income. Form 1099-C “Cancellation of Debt” informs the IRS about debt that has been cancelled or wiped out in bankruptcy. A creditor or money lender has to file this form to inform about the cancellation of debt of more than $600 to a debtor and to the IRS.
Among the reasons to file a 1099-C are:
• You negotiated a settlement to pay the debt for less than the amount you owe and the lender forgave the rest of the loan amount.
• You owe a home that is now in foreclosure, and there is a difference between the value of the home and the amount owed – in this case, be sure to check out our post on 1099-A.
• You sold the home in a short sale and the lender agreed to accept a lump sum amount.
• You fail to pay anything on a debt for the past three years and must surrender a property in a bankruptcy proceeding.
Who needs an IRS 1099-C form?
A financial institution under section 581 or 591(a), a credit union, a successor of FDI corporation, NCU administration, military department, U.S. postal service, postal rate commission, a federal government agency or finance company all may need to file the 1099-C form. If you receive a Form 1099-C from a lender, you’ll have to report the amount on that form to the Internal Revenue Service as taxable income.
When is IRS 1099-C due?
File copies with the IRS by the end of February and a copy to the debtor by the end of January.
How do I fill out IRS 1099-C?
The creditor must provide information such as the name of the debtor, TIN (Taxpayer Identification Number), address, and date of the cancellation. The document must describe the debt, list the total the amount forgiven and provide a reasonable market value of the property in case real estate is involved.
For more information on form 1099-C and it’s relationship with 1099-A, check out the following video:
Where do I send IRS 1099-C?
Send one copy of the 1099-C to the IRS and copy B to the debtor and keep copy C with you.