What is a 1099-C Form?

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If you had a debt discharged this year, you’re not completely free and clear from it yet. The IRS treats some canceled or forgiven debt as taxable income that you’ll need to claim on your upcoming federal tax return. This income is reported to the IRS using a 1099-C tax form.

Here’s what you need to know about IRS Form 1099-C before you file your taxes:

What is a 1099-C form?

Creditors are required to file a 1099-C form with the IRS when a debt of $600 or more has been discharged. You’ll receive a 1099-C form from the creditor with details about the discharged debt so that you can include it as "other income" on your 1040 tax return form.

You may receive a 1099-C form if you had debt canceled, forgiven or discharged due to:

  • Certain bankruptcy cases
  • A federal or state-ordered court proceeding
  • Expired statute of limitations on the debt
  • An agreement between you and the creditor
  • A debt settlement agreement
  • Terms in the creditor’s policy to stop collecting on the debt

What is a cancellation of debt?

A cancellation of debt occurs when a creditor forgives or cancels all or a part of a debt you owe. The amount of debt discharged may be considered taxable income under federal rules, so you may receive a 1099-C form as a way to report the forgiven amount. Similar to the way you’d reference a W-2 from your employer to fill out your federal tax return, a 1099-C form provides you with the necessary details to report the discharged income on your 1040 tax return.

Since the forgiven debt is considered taxable income, your tax refund may be affected, or the discharged debt income may result in owing more federal taxes when submitting your return.

What to do if you receive a 1099-C form

If you receive a 1099-C in the mail, don’t ignore it. Carefully read the 1099-C instructions and confirm that the canceled debt is in fact yours and that it states the correct amount and details. The IRS requires creditors to include a contact number in the creditor information box. If you spot an error, reach out to the creditor immediately to request a corrected 1099-C form.

The creditor may not agree to send you a corrected 1099-C. In this case, include the amount listed on your 1099-C as "other income," but include an explanation as to why it’s incorrect.

Also determine if the discharged debt is eligible for an exemption or exclusion. If it is, the amount may not be considered taxable income. Keep reading to find out if your canceled debt is exempt or excluded.

Any discharged debt of $600 or more that doesn’t fall under an exemption must be reported on your Form 1040 or 1040NR tax filing.

When should I receive a 1099-C?

The creditor who held your original debt typically sends you a 1099-C form. According to IRS rules, creditors should send you a 1099-C for discharged debt by January 31.

If you had discharged debt from multiple creditors, you may receive separate 1099-C forms for each canceled debt. However, just because you don’t receive a 1099-C for a discharged debt doesn’t mean you’re off the hook — you’re still required to report that amount on your tax return. Similarly, you may not receive a 1099-C for discharged debt less than $600, but you’re still responsible for reporting it on your tax return.

What happens if you don't file a 1099-C?

Not reporting 1099-C income carries serious consequences. The IRS may initiate an audit of your tax return and impose additional taxes and penalties, as well as charge interest on any outstanding owed taxes as a result of unreported income from discharged debt.

Does your debt qualify for a 1099-C exception?

The following types of debt qualify as exemptions and aren’t considered cancellation of debt income, per the IRS:

  • Gifts or inheritances
  • Some student loans forgiven under federal programs, like Public Service Loan Forgiveness
  • Canceled debt that would have been tax deductible if paid
  • A price reduction on a property sale by the seller
  • Pay-for-Performance Success Payments through the Home Affordable Modification Program that lowers your mortgage’s principal balance
  • Death or total and permanent disability discharge of student loans

These exceptions take precedence over exclusions. Exclusions are technically cancellation of debt income, but may be excluded as income:

  • Title 11 bankruptcy canceled debt
  • Insolvency-based canceled debt
  • Qualified canceled farm debt
  • Qualified canceled real property business debt
  • Qualified canceled principal residence debt. However, you must have entered into a discharge arrangement in writing before January 1, 2018.

How does a 1099-C affect your credit?

The 1099-C form itself isn’t reported to the credit reporting agencies and therefore doesn’t directly affect your credit. However, your credit may have been affected by the events leading up to a debt discharge or cancellation of debt.

For example, if you were past due on a personal loan, the creditor likely notified the credit bureaus of any late payments or that the debt went into collections. These notices can affect your credit score before — and after — the debt is canceled. For example, collections take seven years to fall off a credit report.

So, if you’ve received a 1099-C or had a debt recently discharged, make sure you take the steps to confirm that the amounts stated on the form are accurate and that you’ve established whether the cancellation of debt income qualifies for exemption or exclusion. Consider reaching out to a tax professional to learn more about your options if you need more guidance, but remember that the best way to address a 1099-C form is head-on.

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