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DEBT RESOLUTION TIPS |
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- Accept that the 1099-C form is coming your way. Plan to take it to your tax preparer for assistance.
- Be sure to consult with a tax adviser who is knowledgeable about 1099-C forms to discover potential tax implications before finalizing debt settlement agreements
- Make sure the debt collector or creditor gives you the exact amount that will be declared on the 1099-C form
- If there is a dispute about the amount reported on the form, contact the creditor or debt collector immediately to resolve any dispute about the amount reported on the 1099-C form, and ask for a corrected 1099-C form.
| Many months after thinking they have resolved their credit card debts, consumers are receiving 1099-C "Cancellation of Debt" tax notices in the mail. This is because the U.S. Internal Revenue Service considers such forgiven or canceled debt as income.
The law requires any debt collectors or creditors who have agreed to accept at least $600 less than the original balance to file 1099-C forms with the IRS. They must also forward debtors notices, and taxpayers must report that "income" on their federal income tax returns.
Even though the taxpayer may not have income enough to pay the required taxes, such forgiven debt is considered income, according to the Internal Revenue Code.
For example if a person negotiates a $10,000 credit card debt down to only $6,000 of the balance, he or she would have $4,000 in forgiven debt income. The IRS says that $4,000 should legally be reported as "other income" on Line 21 of the 1040 tax form.
The consumer, depending upon the amount of forgiven debt, could face a large tax bill next April 15. Income level, deductions and other factors may also affect the size of the tax bill.
Homeowners who default on mortgage loans may qualify for exclusion of their foreclosures under the Mortgage Forgiveness Debt Relief Act, which took effect Dec. 20, 2007. This act was signed into law to help homeowners caught in the mortgage crisis and may enable some homeowners to qualify for exclusion of their foreclosure "income."
Additional exclusions include certain farm debt, student loans and real property business debts.
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Our firm provides the information in this e-newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.
IRS Circular 230 Notice: To ensure compliance with requirements imposed by the IRS, we inform you that any US tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code. |
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