Tax Suprise - 1099C

It is that time of year - resolution time. Everyone is making promises to make themselves better; lose weight, exercise, quit smoking, get out of debt... And all over the TV are companies who are promising to help you meet your goals, for a fee. They want to sell you equipment, special programs, food and services to make your goal a reality. Buyer Beware!

Over the last few days, I have seen several companies which promise to help you with credit card debt. They promise to help you "settle" with the card companies. These companies have been around for a while. Generally, they negotiate with the card company for reduced interest rates and a more forgiving pay back schedule for you. Each company is different and it's up to you to do your research into the company and their program. The last few days I have hear the word "settle" much more often (or it's being pushed more.) It is the word "settle" that is the reason for this post. To me, "settle" seems to be implying a end of the problem (the debt). A forgiveness of the debt. If you owe on a credit card and the card company agrees to forgive that debt, so you don't pay them back all or a part of what your owe them, you will generally owe taxes on the money they forgive. The card company/debt negotiator may not warn you about this. Too often, I have had clients who received this surprise in the mail and they don't know what it is.  Often it is sent with all the papers they receive documenting the debt forgiveness, and they file it with that paperwork.

1099C Cancellation of Debt is the form this surprise takes. It can be issued not just for credit card debt but foreclosures in general. I am sure there are taxpayers who have seen this form for a home they could no longer afford. The bottom line is that if a lender forgives you a debt you can be taxed on the amount of the debt. Why, because it could be a deductible expenses for them and if they deduct it someone has to be taxed for it. So, for the taxpayer, it is income. It is taxed in the year the debt is forgiven. You should receive a 1099C but like I mentioned earlier it could come with all the documents to close the debt. You many need to look for it. Since the lender has issued a 1099C, this income will show on the IRS matching program. If you miss it in the year it is issued, it will catch up with you later with penalties and interest.

If a lender, be it credit card company, bank, credit union, etc., forgives a debt you owe them, you have to understand that there may be tax consequences and prepare for them. Talk to your tax professional.

Comments

[nooneofconsequence]

Allow me to ask a 1099C question, but first let me post the letter I will be mailing to a mortgage company:

Dear Mr. …..

A little over one year ago I received notice from the IRS that your company filed a 1099C (Cancellation of Debt) against me. The 1099C was dated March 13, 2006. This puts me at a severe tax liability, as I am sure you can imagine.

Since I never received any notice of the existence of the 1099C, penalties and interest have increased this debt to the IRS. It is curious to me that your company would send a 1099C to an address that your company foreclosed on in 2002. I can’t think of a more unlikely place to expect to find and notify me.

But wait…there’s more!

I received a summary from the IRS, and the 1099C filed by your company shows “bankruptcy not indicated”.

Let me get to the facts.

In 1998 my wife and I purchased a manufactured home on a private lot for $86,000.

In the year 2000 my wife and I filed for bankruptcy, and because I listed a near worthless piece of property (that I owned with two of my brothers), the Court ordered a Rule 341 Hearing with the Attorney for the Trustee of the Bankruptcy Court.

During the Rule 341 Hearing, the Attorney asked to see the title for the manufactured home, and immediately seized the title because Cendant Mortgage (that would be your company) failed to put their name on the title as a secured party.

Then the “fun” began.

Allow me to define the type of “fun” experienced. “Fun” is finding out that your wife hurt herself, and had to be hospitalized. “Fun” is losing your home and your marriage.

My wife asked me to leave in 2002, and I did. And I had no further contact except for the divorce proceedings, which lasted 15 minutes.

The Attorney for the Trustee of the Bankruptcy Court backed off in 2002 because the assets I claimed were near worthless. Cendant (your company) foreclosed and took possession of the property later in 2002.

I can hardly express my surprise when I found out that I had somehow gained over $100,000 in benefits from this disaster in my life (caused by Cendant’s non/malfeasance).

I am, in a gentlemanly way, asking that you review this case and contact the IRS. Your company undoubtedly received a tax break by submitting a false 1099C, and now you must accept that liability.

I am eager to put this period behind me, and I want to walk away.

I really don’t know the breadth of any liability your company may have (to the IRS and potentially to me), and I don’t want to find out. I want to go away.

You need to correct this. Please contact the IRS, and get them off my back.

Feel free to call me at anytime, at , if you wish to discuss this matter.

Respectfully,

So...am I wrong here?