Definition
Form 1099-C is a tax document that reports cancellation of debt to the IRS.
Analysis
Form 1099-C is issued when forgiven debt equals or exceeds a $600 reporting threshold. If you receive Form 1099-C, it could mean that you owe additional income taxes.
Form 1099-C is automatically issued when $600 or more of debt is canceled as a result of:
In most cases, additional income tax liability results from Form 1099-C. However, there are some exceptions that may allow a taxpayer to avoid paying additional tax on forgiven debt, such as if insolvency can be proven.
Many debtors find out the hard way that they owe substantial sums of money to the government. Debt settlement companies are notorious for failing to mention this liability that is created when you settle a debt.
Taxes are owed on forgiven debt. This is calculated from your marginal (highest) tax rate. After paying fees to a debt settlement company and taxes on forgiven debt, this can wipe out most of the “savings” from settling on a debt.
Form 1099-C is automatically supplied by creditors to the IRS when you settle on a debt. If you fail to report it, it could result in penalties or interest resulting from an inaccurate tax return.
Additional Resources
Sample Form 1099-C
