What is a 1099-C?

"What is a 1099-C?" is the question taxpayers will be asking as these forms arrive in their mailboxes this year. If you received one of these forms, you may be confused. "Why did I get this? What does it mean?" You are probably starting to search online to learn more and that's what brought you here.

What is a 1099-C?

A 1099-C reports Cancellation of Debt Income (CODI). A lender is supposed to file a 1099-C form if it "cancels" $600 or more in debt. You must include the amount of cancelled debt in your gross income for that taxable year. It files a copy with the IRS and is required to send a copy to the taxpayer as well. Four common reasons for filing a 1099-C are:

  • You negotiated a settlement to pay a debt for less than the amount you owed and the creditor forgave the rest;
  • You owned a home that went into foreclosure and there was a deficiency (a difference between the home's value and what you owed on it) which was either forgiven or remains unpaid;
  • You sold a home in a "short sale" where the lender agreed to accept less than the full balance due; or
  • You did not pay anything on a debt for at least three years and there has been no significant collection activity for the past 12 months.

Can you avoid paying taxes on the forgiven debt?

Determine whether you can avoid or reduce the amount of cancelled debt on which you have to pay taxes due to one of the following exceptions or exclusions:

Canceled Debt that Qualifies for Exclusion from Gross Income:

  1. Cancellation of qualified principal residence indebtedness
  2. Debt canceled in a Title 11 bankruptcy case
  3. Debt canceled due to insolvency
  4. Cancellation of qualified farm indebtedness
  5. Cancellation of qualified real property business indebtedness

Canceled Debt that Qualifies for Exception to Inclusion in Gross Income:

  1. Amounts specifically excluded from income by law such as gifts or bequests
  2. Cancellation of certain qualified student loans
  3. Canceled debt that if paid by a cash basis taxpayer is otherwise deductible
  4. A qualified purchase price reduction given by a seller

If you qualify for an exception or exclusion, complete IRS Form 982 to challenge liability under the 1099C.

Categories: Tax debt
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