Taxation of Forgiven Debt: The 1099C & You

Often people fall on hard times and stop paying on credit cards. After a while the account may go to an outside debt collector who might offer a settlement of the debt for 30-40% of theoriginal sum. Once this is paid, the debtor often thinks the matter is closed, but it is not! It is very likely that the creditor will issue a 1099-C. This is a notice to IRS of the forgiven debt. If the debtor does not address this on his return he may get an IRS bill a year or two later with penalties and interest.

A foreclosure on a home may also result in a 1099-C from the mortgage lender if the property is sold for less than the amount of the loan. In this instance, a person loses their home and may also face a tax bill. Usually, the bill comes many months after the tax return was filed as a result of an IRS document matching program. This "under-reporter" notice brings grief to the taxpayer.

The key issue is whether or not the debtor was insolvent. If they were insolvent, it may not be taxable depending on the circumstances. There is an "Insolvency exclusion." You are insolvent when, and to the extent, your liabilities exceed the fair market value of your assets. So it is possible none of your forgiven debt is taxable or it is possible that all or only a portion of it is includable in income.

If you get a 1099-C, don't ignore it. Have a tax professional do your return and they can help you determine how much of the 1099-C is taxable. If you get a letter from IRS on a 1099-C you left off your return, get help ASAP. Otherwise, IRS might file a Federal Tax Lien and take action.

Look for a CPA, Enrolled Agent, Accredited Tax Advisor, Accredited Tax Preparer, or Tax Attorney to help you with serious tax issue. You may call the IRS at 1-800-829-1040 for help as well. Websites you can check out include: www.irs.gov; www.naea.org; www.nsacct.org; and www.exirsman.com.

James Robert Coleman, E.A., A.T.A.
Enrolled Agent & Accredited Tax Advisor
Member: National Association of Enrolled Agents
Former IRS Revenue Officer, GS-11
http://www.exirsman.com

In The News:


pen paper and inkwell


cat break through


Understanding Marketing Tax Deductions

Marketing is a necessary expense in running practically any business... Read More

IRS Obtains More Than 100 Injunctions Against Tax Scheme Promoters

The IRS has obtained civil injunctions against more than 100... Read More

Tax Strategy - Let Washington Pay for Your Corvette, Porsche, or Air Plane

Deducting Your Auto ExpensesAuto deductions are a very complex topic.... Read More

A Taxing Investment

April 15 - The most dreaded day of the year... Read More

Anticipating Your IRS Refund Can Cost You Plenty

While accountants are reaching for aspirin, millions of Americans are... Read More

How To Get An Instant Pay Raise

As a gentleman was leaving my class recently, he wanted... Read More

Requirements To Produce Tax Information (Whats Up With That?)

"What we've got here is a failure to communicate." ... Read More

Taxing Overseas Firms for SOX Compliance

The Sarbanes-Oxley Act, also called the Public Company Accounting Reform... Read More

Fraudulent Tax Shelters ? KMPG Goes Down Hard

In the largest criminal tax case ever filed, KMPG has... Read More

Another Tax Loophole

Just image, you are a small manufacturing company, business has... Read More

IRS Offer-in-Compromise, Hype or Hope?

"Settle for Pennies on the Dollar! IRS debts settled for... Read More

Tax Investigation - What You Need To Do

The knock on the door from a Tax Inspector is... Read More

Small Business Tax Issues for Self-Employed Individuals

The United States is a nation of entrepreneurs. There are... Read More

Know A Tax Cheat? Get Paid To Tell The IRS

According to the IRS, taxpayers underpay their taxes by some... Read More

Understanding Basic Tax Terms

If your like many, you don't always understand what people... Read More

Alas! In E-Commerce Taxland

In trying to comply with tax laws for your e-business,... Read More

Rearrange Your Affairs For Maximum Tax Savings

One way to maximize your business profits is by reducing... Read More

Tax Trap #5 -- Ignoring The IRS (and the 5 best ways to contact them!)

We all love to criticize the IRS, don't we? And... Read More

What You Need To Know About Taxes If You?re Getting Married

It may not be high on the list of wedding... Read More

Amending Procedural Laws for Collection of E-taxation

The electronic transaction ordinance defines the certificated copies in which... Read More

Employment Taxes ? Depositing With The IRS

If your business has employees, you must pay employment taxes.... Read More

Save Money on Taxes - Is the Only Way to Get Your Tax Savings is to Sleep With an IRS Agent?

Tilting the Tax Laws in Your Favor.In order to accelerate... Read More

Tax Help Secret: Avoiding the Entreprenuers Curse

Your days as an entrepreneur and businessperson are consumed with... Read More

IRS Certifies 2006 Toyota Hybrid for Clean Fuel Deduction

The Internal Revenue Service has certified the 2006 Toyota Highlander... Read More

Deducting Points On Home Refinances

Deduction of Refinance PointsAny points that you pay in the... Read More

Access to E-records by Taxing Authorities: A Case for Pakistan (Part II)

All tax authorities to e-commerce transactions should investigate the record... Read More

Reducing Taxes Through Dividend-Salary Mix Calculations

Should I take wages or dividends from my privately owned... Read More

10 Thoughts on Tax Offer in Compromise

Beware of advertisements that claim to settle tax debts for... Read More

Complaince of Tax Return in Electronic Commerce Taxation

Emerging Legal issues of Tax compliance of e-business Self-assessment system... Read More

Send Your Kids To Summer Camp and Write It Off

If you paid someone to care for a child so... Read More

Tax Trap #4 -- The Quagmire of Depreciation

If you are a Small Business Owner or Self-Employed Person,... Read More

Render Unto Caesar

Once a year Canadian taxpayers are required, by law, to... Read More

Organizing Your Taxes

Does this scene sound familiar? It's April 7. You haven't... Read More