12.1.4 Form 1099-C

Creditors defined as “applicable entities” by I.R.C. § 6050P(c)(2) are required to issue a Form 1099-C reporting debt cancellation income to the IRS when they reduce a debt by at least $600. The duty to issue a Form 1099-C is triggered when there is a discharge of debt, which is deemed to occur when there has been an “identifiable event” as defined in 26 C.F.R. § 1.6050P(b)(2)(I). The IRS will argue that a discharge of debt occurred when the “identifiable event” occurred. But the IRS may be wrong. In some cases, the “identifiable event” may not constitute a discharge of the debt for determining when or whether debt cancellation resulted in income.

A Form 1099-C does not establish that a debt was discharged or the date of discharge.1  A Form 1099-C is not dispositive. If the taxpayer asserts a reasonable dispute with respect to reported income, I.R.C. § 6201(d) may shift the burden of production to the IRS, requiring it to produce reasonable and probative evidence in addition to the Form 1099-C.2  Unjustified reliance on Forms 1099-C by the IRS has led to attorney fee awards for taxpayers.3

The issuance of Forms 1099-C has skyrocketed in recent years. In 2005, debt buyers were, for the first time, required to issue Forms 1099-C.4  Most buyers of credit card debt have no idea or records of the balance due by the borrower before the original creditor charged off the debt. This ignorance produces inaccurate Form 1099-C reports of debt cancellation income. Often, debt buyers don’t know where the debtors live. So, many taxpayers never receive their Forms 1099-C.

Many low-income taxpayers don’t understand Forms 1009-C or their potential tax liability. A taxpayer should review Form 1099-C (or Form 1099-A) for accuracy and request correction by the lender/creditor if inaccurate. If the debt was transferred to a debt buyer, it is likely that the discharged debt is wrong if reported by the debt buyer. IRS Publication 4681 explains how to read Forms 1099-A and C. A taxpayer who erroneously paid taxes on cancellation of debt income may be able to amend the tax return to claim a refund.

• 1Sims v. Comm’r, T.C. Summ. Op. 2002-76.
• 2McCormick v. Comm’r, T.C. Memo 2009-239; cf. Portillo v. Comm’r, 932 F.2d 1128 (5th Cir. 1991).
• 3See, e.g., Owens v. Comm’r, 67 F. App’x 253 (5th Cir. 2003).
• 4Unfortunately, debt buyers are now “applicable entities” and are required to report debt cancellation. See Debt Buyers’ Ass’n v. Snow, 481 F. Supp. 2d 1 (D.D.C. 2006).