01 Feb What Is A 1099-C & What Do I Do About It?
With the start of a new year, and the deadline for filing tax returns just around the corner, W-2s and 1099s are beginning to show up in the mailbox. This year, a new type of 1099 may show up unexpectedly. If any debts were cancelled last year, banks and other financial institutions are required to report the cancellation to the IRS and provide a 1099c to the taxpayer.
If a credit card debt was settled for less than full payment, the IRS considers the difference between the balance due and the amount paid to be income unless excluded under one of the statutory exemptions. If a 1099c is issued to you and your return does not include the debt cancellation information, you will receive a notice, from the IRS, that you omitted income on your return. The IRS will propose an increase in your tax liability and, absent explanation of an exclusion form income, will send a Statutory Notice of Deficiency (SNOD) that will begin the process of assessing additional tax as well as penalties and interest.
If you are working with a professional tax preparer, and you provide them with the 1099c, they will include the debt cancellation with your income for the year unless one of the following five exceptions applies:
- The debt cancellation occurred as the result of a bankruptcy;
- The debt cancellation occurred when you were insolvent;
- The indebtedness cancelled was qualified farm indebtedness;
- In the case of a taxpayer other than a C corporation, the indebtedness cancelled was qualified real property business indebtedness; or
- The indebtedness cancelled was qualified principal residence indebtedness which is discharged before January 1, 2012.
The debt cancellation must be reported on a form 982 and submitted with the tax return when it is filed to avoid a notice from the IRS. If you are preparing your returns without professional assistance, the IRS has detailed instructions for completing form 982 on their website.
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