Why Did I Receive Form 1099-C (Cancelled Debt)?
If you don’t know how terrifying it feels to receive form 1099-C even after you’ve had your debt forgiven, then you have no reason to start celebrating just yet. Most of those who receive it suddenly have their joyous celebrations cut short by the taxman, and it certainly isn’t a pleasant experience.
The good news with it is that you’ll no longer have to dodge your creditors. Yes – that debt will have been written off, and you’re a free man again.
But the bad news? Well, you will have to report it to the tax authorities still as they assume that 1099-C is part of your income!
But first, what is Form 1099-C and why do people receive it?
Form 1099-C is an official IRS tax document that serves to show that you no longer owe your creditors any debt. It might have been cancelled, primarily due to repossession, foreclosure, abandonment of property, etc.
Typically, many see it as another useless document that serves no useful purpose and readily dismisses it. Unknown to them, however, form 1099-C is a vital piece of document.
You see, the IRS considers that any debt that’s forgiven, written off or discharged is taxable income. They assume that the creditor must have made the same money elsewhere and that you are subsequently richer by the same amount. And they receive a copy from the creditor as well.
What if I didn’t receive form 1099-C yet my debt was forgiven?
You MUST report your forgiven debt, whether you received this document or not. It doesn’t matter whether it was your student loan subjected to income-driven plan or disability discharge or any other form of debt forgiveness. The only exception is when the forgiveness was through the Public Service Loan Forgiveness or any other known loan forgiveness program.
What to do when you receive your 1099-C
It is, thus advisable that once you get it, waste no time reporting to the authorities lest they consider it as part of your taxable income. You will have to include it as part of your year’s tax returns – the specific year when the debt was written off. If you don’t do it, the IRS will consider you a defaulter, and that’s when dire penalties are tossed your way.
- So, upon receiving it, spend some time verifying the amount indicated so that you are sure everything is accurate. If there’s an error, notify the creditor and the IRS immediately.
- Talk to a professional to get advised accordingly. Cancelled debt automatically increases your total taxable income and may even disqualify you from getting any deductions and credits.
- Of course, you should file your returns and indicate the amount discharged. Any cancelled debt is reported through Form 1040.
- Finally, purpose to pay the bill. If it’s too large for you, talk to IRS and schedule a good plan.
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