Final regulations remove the requirement that certain financial institutions and governmental agencies issue a Form 1099-C, Cancellation of Debt, when a debtor fails to make a payment for 36 months.
Certain financial institutions and governmental agencies are required to file with the Internal Revenue Service and furnish to the debtor Form 1099-C, Cancellation of Debt, if, during a calendar year, any one of eight identifiable events discharging a debt of $600 or more occurs. Form 1099-C contains information identifying the debtor, the creditor, the amount of the debt discharged, the date of the identifiable event causing the discharge, and certain other information.
The first seven identifiable events in the regulations typically result in the actual discharge of a debt through operation of law, agreement by the parties, or decision by the creditor to cease collection efforts and discharge the debt. Under the eighth identifiable event, a rebuttable presumption that a debt has been discharged arises if the debtor fails to make payments on the debt for the “nonpayment testing period,” which is generally 36 months. Thus, the failure of the debtor to make a payment for 36 months generally requires the creditor to file and furnish a Form 1099-C, even if the creditor has not ceased collection activities and discharged the debt. The creditor may rebut the presumption if the creditor engaged in significant bona fide collection activity at any time within the 12-month period ending at the close of the calendar year or if certain other facts indicate that the debt has not been discharged.
The 36-month nonpayment testing period was first added to the regulations in 1996. The regulations were amended in 2008 and 2009, and in 2012 the IRS issued a notice requesting comments on the rule. The Department of Treasury and the IRS were concerned that the rule creates confusion for taxpayers and does not increase compliance by debtors or provide the IRS with valuable third-party information that may be used to ensure taxpayer compliance. In 2014, Treasury proposed regulations to remove the rule.
The final regulations remove the 36-month nonpayment rule effective for Forms 1099-C required to be filed and furnished after 2016. Forms 1099-C are issued in the calendar year following the calendar year in which the debt is discharged. Thus, expiration of the 36-month nonpayment testing period in calendar year 2016 (that is, the debtor has not made a payment for 36 months before Jan. 1, 2017) will not require a Form 1099-C to be filed or furnished.
General Rule for Debt Forgiveness
If a lender forgives some or all of an individual’s debts, the general rule is that the forgiven amount is treated as ordinary income and the borrower must pay tax on the forgiven amount. Exceptions apply for bankruptcy, insolvency and certain other situations, including home mortgage debt (but this exception is temporary and is set to expire at the end of 2016).
Current Law for Mortgage Debt (January 1, 2007 through Dec 31, 2016)A borrower can be excused from paying tax on forgiven home mortgage debt (up to $2 million), so long as the debt is secured by a principal residence and the total amount of the outstanding mortgage does not exceed the original purchase price plus the cost of improvements. Thus, the cancelation of mortgage debt rules provides relief to a limited number of taxpayers.
What happens to the seller when a portion of mortgage debt is forgiven?Under pre-2007 law, the amount of forgiven mortgage debt (the $12,000 in this example), would have been treated as income, and taxed at ordinary income rates. Thus, the seller, who had experienced a true economic loss, would have been required to pay tax on this “phantom” income, even though no cash has changed hands and even though he has experienced a loss. Under the temporary provision that expires at the end of 2016, the forgiven amount is not subject to income tax.
Does this provision apply to a refinanced mortgage?
Only in limited circumstances. The relief provision can apply to either an original or a refinanced mortgage. If the mortgage has been refinanced at any time, the relief is available only up to the amount of the original debt used to acquire the residence (plus the cost of any improvements). Thus, if the original mortgage was $125,000 and the homeowner later refinanced in a cash-out arrangement for a debt totaling $140,000, the $15,000 cash-out is not eligible for relief if a lender later forgives some amount related to the cash-out. Relief is generally not available for second mortgages or home-equity lines of credit where the funds are not used for home improvement.
How does the homeowner get the correct information to the IRS?
The lender is required to provide the homeowner and the IRS with a Form 1099-C reflecting the amount of the forgiven debt. The borrower/homeowner must determine (often with a tax advisor) whether the forgiven amount is reported (taxable) or excluded (not taxed) on his/her Form 1040 for the tax year in which the debt was forgiven. For example, a lender that forgave mortgage debt in March 2015 would provide the 1099 information to the IRS and the homeowner in January 2016 and it would be reflected as appropriate on the 20154 Form 1040 that is due April 15, 2016.
Does this provision apply to commercial real estate?
Permanent rules enacted in 1993 can provide relief to debt-burdened commercial real estate and rental properties. The 2007 provision puts commercial/investment property and residential owner-occupied property on similar footing.
What if a property declines in value, but the owner stays in the house?The provision would not apply unless the lender agrees to reduce the amount of mortgage debt owed. The provision applies only at the time of sale or other disposition or when there is a workout (reduction of existing debt) with the lender. No mechanism exists to reflect the loss of value when a property remains in the hands of the underwater borrower and no changes are made to the mortgage balance. Similarly, if the home is sold for a loss, there is no capital loss treatment available for that sale.
Do all lenders forgive mortgage debt when property values decline or in foreclosure?
No. In states with applicable laws, the lender may require a repayment arrangement, particularly if the borrower has other assets.
When did this legislation pass?
A version of the mortgage relief provision passed the House in 1999 and 2000, but was not enacted. The rules of current law were enacted in 2007 as part of H.R. 3648, a bill focused solely on housing issues. The original rules were effective from January 1, 2007 through December 31, 2009. The provision was extended through December 31, 2012 in 2008, and it was again extended through 2013 in the American Taxpayer Relief Act of 2013. Next, the Tax Increase Prevention Act of 2014 extended the provision through the end of 2014. The most recent extension was for two years (through December 31, 2016) in the Protecting American Taxpayers from Tax Hikes (PATH) Act of 2015.
Are there other exceptions to paying income tax on the short sale amount of debt forgiven on a primary residence sale?
Yes - Bankruptcy or insolvency are two common exceptions claimed on form 982 in the year you receive a 1099-C from your bank.
In an environment where many schools have less college students and there is competition for students there have been and will be college school closings. This environment was fuel with the problems that ACICS has been having. ACICS is one of many oversight entities. They have been named as one of the more troubled entities and have a good bit of government investigation on their practices as many of their schools have low graduation rates, low job placement rates and other indications that education quality is not being maintained. What happens if your school closes? Can you get your student loan forgiven?
Federal Student Loans
Colleges that close while the student is attending qualify the associated student loans for forgiveness. The student must be currently attending the institution defined as having been enrolled for at least 120 days. The student must not have graduated the institution and can not be attending a different school in a comparable program. If this criteria is met then the student may qualify to get their student loan balances forgiven.
Private loans typically can not be forgiven and do not follow the criteria mentioned above. Recently the Consumer Financial Protection Bureau has gotten private loans forgiven where the lender was engaging in predatory loan practices. If you feel you are a victim of a private student loan obtained under predatory loan practices this federal government agency would be the one to contact.
As with all debt forgiveness the amount forgiven is considered income and a Form 1099-C will be issued. If you receive this tax form at year end it is your responsibility to file and report the 1099-C income but you also have an opportunity to exclude the income under one of the exceptions available on IRS Form 982. The most common exception is the fact that you are insolvent which allows you to exclude the 1099-C in part or in full from your taxable income.
Ms Bacon's tale is of a 1099-C gone wrong. In 1994 Ms Bacon told FEMA that her principal residence was damaged by an earthquake and she received funds to repair her property. FEMA later determined that the property did not qualify as her primary residence and sought the return of FEMA funds of $3450. Ms Bacon did not dispute the claim she just did not pay the funds back to FEMA. FEMA contacted Ms Bacon numerous times from January 1995 to September 1997. FEMA turned the case over to the Department of Justice and based on the six year statue of limitations the claim expired on January 27, 2001. No action was taken by the Department of Justice. In January 2008 FEMA issued a Form 1099-C to Ms Bacon for $6,297 which represented the $3450 plus interest and penalties.
Ms Bacon did not report the 1099-C on her tax return. She did not file a form 982 to exclude the income. The IRS accessed a tax against Ms Bacon for her 2007 tax year and proceeded to try and collect the tax. Ms Bacon went to tax court and in tax court opinion 2015-15 her tax balance was overturned and the court ruled that she did not owe the IRS. The tax is not owed when the Form 1099-C is issued but rather when FEMA knew it could no longer collect its balance due in 2001 and not 2007. Since FEMA failed to issue a timely Form 1099-C Ms Bacon saved her bacon and did not have to pay the IRS any tax.
This case illustrates a lot of important points about IRS Form 1099-C income and the related IRS tax owed.
1. Form 1099-C tax relief is not automatic. You have to file for exclusion of income from Form 1099-C cancellation of debt income.
2. Many Form 1099-C's are incorrect and you can dispute them with the issuer when you receive them and get them corrected before you file your taxes.
3. Government agencies are required to issue Form 1099-C's which is a little known fact.
4. Form 1099-C's can be issued for bills dating back many years in the past.
Ms Bacon got some good tax assistance and won her case against the IRS. If you receive a 1099-C you need to make sure you get good representation to help you file and pay taxes when you receive a 1099-C or even better file and exclude 1099-C income properly on your personal tax return.
Based on a Government Accountability Office report released September 30, 2010 titled "Tax Administration: Expanded Information Reporting Could Help the IRS Address Compliance Challenges with Forgiven Mortgage Debt" 169,000 Form 982's were filed with the IRS in 2008. In 2008 taxpayers received over 2 million form 1099-C's. That means only about 8.5% of 1099-C's were excluded by filing 982 and so taxpayers paid unnecessary IRS taxes. Form 1099-C's issued by financial institutions have skyrocketed to 5.9 million in 2014 and are projected to 8 million by 2023. Assuming the filing rate of Form 982 does not increase there is going to be a tremendous amount of extra tax paid to the IRS that is not owed or that could be excluded with exceptions legally allowed on Form 982. Since a 1099-C is issued when debt is cancelled and forgiven it would make sense that a high percentage of taxpayers who receive a 1099-C were insolvent and that is why they were unable to pay their bills. Many of the people that receive 1099-C forms are low income or facing crisis due to a sudden loss of a job or medical bills from an illness so the extra tax burden from Form 1099-C is a new financial crisis to a population segment without much of a financial safety net.
CP 2000 notices are issued when taxpayers fail to report 1099-C's as income. These notices include a tax due amount and more than half of taxpayers either fail to respond to these notices or pay the balance owed even when the amount due could have been excluded with a written explanation and a Form 982 filing along with proof of insolvency using an insolvency worksheet. By not responding to the notice the IRS automatically assess a tax balance due and then start the collection process to obtain payment of the additional tax due with no regards to whether the tax was calculated properly or even due.
Properly filed Form 982 tax return incur additional complications. The IRS sends out a number of CP2000 notices with additional tax due even when the form 982 is filed. They request proof of insolvency and require the taxpayer to respond to a CP2000 notice even though they filed their tax return correctly and excluded the extra income properly.
A taxpayer that receives a Form 1099-C or a CP2000 notice should hire a tax accountant that has experience in excluding this extra income and in preparing Form 982 and should take advantage of the exclusion of income allowed by the Form 982 and not pay the IRS tax that is not due. There may be extra professional fees for help in this complex tax area but by paying for this extra help the taxpayer may be saving tremendous amounts of IRS income tax owed.
Debt settlement fees are incurred in reducing debt to manageable levels by obtaining professional assistance in reducing the amount of outstanding debt owed. This cancellation of a portion of your debt could generate an IRS form 1099-C at year end listing taxable income for the amount of debt cancelled.
Form 1099-C income may not be taxable if you file a form 982 and claim one of the exceptions allowed to avoid additional income. The most common exception is insolvency which means your liabilities exceed your assets. If you can prove your insolvency and claim it on IRS form 982 attached to your Form 1040 tax return you will not owe additional tax due to the form 1099-C that you received.
Debt settlement fees related to 1099-C income are tax deductible as itemized deduction subject to a 2% of adjusted gross income limitation and reported on Schedule A of your tax return based on the 2012 Thomas Tran court case
in this court case the Form 1099-C income was fully taxable and no exception was allowed on Form 982. I believe this is the only way the debt settlement fees in this case would be deductible. Fees used to create taxable income are deductible as miscellaneous itemized deductions and this appears to be the reason these fees are deductible. If the income had been excluded then the fees would not be deductible. If the income was partially excluded then it would seem you would need to allocate the fees between the taxable and nontaxable portions. The fees were also paid during the tax year and that is an important requirement as well.
The deduction of debt settlement professional fees as highlighted in this court case are an additional avenue to reduce taxable income from 1099-C if the exceptions allowed on form 982 do not apply to the entire amount.
Receiving a Form 1099-C form the IRS reporting taxable income is a scary experience but if you qualify for the insolvency exception allowed on IRS Form 982 you will not owe any extra income tax. Form 1099-C is sent by banks and credit card companies when you receive cancellation of debt due to a settlement on a credit card for example. Common sense would indicate you would have paid your debt if you were solvent and thus the insolvency exception is normally available for avoiding extra IRS income taxes due to receiving Form 1099-C. The IRS assumes that the amount listed on Form 1099-C is additional taxable income so you will pay extra tax if you don't go thru the extra effort to file Form 982.
What is insolvency?
Insolvency is the inability to pay your debts. The IRS defines insolvency as your liabilities exceeding your assets. An insolvency worksheet provided by the IRS publication 4681 page 8 can be used to determine if you can use the insolvency exception to partially or fully exclude your 1099-C reported amount from taxation on Form 982.
Is full or partial disability an exception to taxing Form 1099-C income?
No - disability does not exclude 1099-C income from being taxed. Insolvency does exclude 1099-C income from being taxed. Many disabled individuals are insolvent because of a minimal accumulation of assets or unpaid bills including medical bills or student loan debt or credit card debt.
Should a married couple file married filing separately when they receive a Form 1099-C?
Married couples should definitely consider filing separately when a Form 1099-C is received. There are many other factors to consider when filing separately so retaining the services of a tax preparer or CPA makes sense when making the decision to file a separate tax return from your spouse. A separate filing in a non community property state does allow each spouse to determine insolvency separately so one spouse could be solvent and the other spouse could be insolvent and exclude form 1099-C income on their seperately filed tax return with a seperate form 982 and an insolvency worksheet listing only their portion of assets and liabilities. It should be noted if the debt is joint the amount assigned to each spouse is calculated based on the use of the funds that created the debt. A form 982 married filing jointly return can be filled as well. Assets and liabilities on the insolvency worksheet would include all joint and separately owned assets and liabilities. A couple can be jointly insolvent and qualify for the insolvency exception.
Should I get help filing out a Form 982?
Yes - paying for professional tax preparation help is a wise investment. The form 982 insolvency exception is questioned by the IRS occasionally after the filing of your return. Having a paid tax return preparer or form 982 CPA expert available to respond to these IRS CP 2000 letters is a good idea.
Can you give an example of a separately filed tax return involving form 982 and insolvency?
In 2015, James and his wife Robin were released from their obligation to pay a debt of $10,000 for which they were jointly and severally liable. None of the exceptions to the general rule that canceled debt is included in income apply. They incurred the debt (originally $12,000) to finance James's purchase of a $9,000 motorcycle and Robin's purchase of a laptop computer and software for personal use for $3,000. They each received a 2015 Form 1099-C from the bank showing the entire canceled debt of $10,000 in box 2. Based on the use of the loan proceeds, they agreed that James was responsible for 75% of the debt and Robin was responsible for the remaining 25%. Therefore, James's share of the debt is $7,500 (75% of $10,000), and Robin's share is $2,500 (25% of $10,000). By completing the Insolvency Worksheet, James determines that, immediately before the cancellation of the debt, he was insolvent to the extent of $5,000 ($15,000 total liabilities minus $10,000 FMV of his total assets). He can exclude $5,000 of his $7,500 canceled debt. Robin completes a separate insolvency worksheet and determines she was insolvent to the extent of $4,000 ($9,000 total liabilities minus $5,000 FMV of her total assets). She can exclude her entire canceled debt of $2,500.
When completing his separate tax return, James checks the box on line 1b of Form 982 and enters $5,000 on line 2. He completes Part II to reduce his tax attributes as explained under Reduction of Tax Attributes, later. He must include the remaining $2,500 ($7,500 − $5,000) of canceled debt on line 21 of his Form 1040 (unless another exclusion applies).
When completing her return, Robin checks the box on line 1b of Form 982 and enters $2,500 on line 2. She completes Part II to reduce her tax attributes as explained under Reduction of Tax Attributes, later. She doesn't include any of the canceled debt on line 21 of her Form 1040. None of the canceled debt has to be included in her income
A taxpayer may elect to exclude 1099-C income due to a discharged qualified real property business indebtedness under IRC §108(a)(1)(D). An eligible taxpayer must make a valid election on a timely filed return (including extensions), to exclude discharged qualified real property business debt from income, by attaching Form 982 to the tax return. A taxpayer may file a late election if an amended tax return is filed within six months of the due date of the return (excluding extensions) under Treas. Reg. §301.9100-2. If an election is not made timely or with an amended return filed within six months of the due of the return, a taxpayer must request permission to file a late election.
In PLR 201316009, 2013 WL 1699430, a taxpayer filed a timely individual tax return in year 1. The taxpayer was a 50-percent partner in a LLC that received cancellation of debt income related to qualified real property business indebtedness. The LLC failed to identify the type of cancellation of debt income and the individual's tax preparer treated the CODI as other income. It was not until year 3 when the tax preparers realized that the taxpayer was eligible to exclude cancellation of debt income under the qualified real property business indebtedness exclusion. The taxpayer subsequently filed a request for an extension to file a late election. The IRS allowed the taxpayer to file an amended return in order for the individual to make the election under Treas. Reg. §301.9100-3(c)(1).
An eligible taxpayer can make this election to exclude CODI and reduce the basis of depreciable real property by the amount of discharged qualified real property business indebtedness. To qualify for this exclusion, IRC §108(c)(3)(A) requires that the real property must be "used in a trade or business." Facts and circumstances must be considered in each case. Rental real estate may qualify under this exclusion if the rental rises to the level of a trade or business. However, the following situations may not qualify under this exclusion.
"…a rental of even a single property may constitute a trade or business under various Internal Revenue Code provisions…However, the ownership and rental of real property does not, as a matter of law, constitute a trade or business. Curphey v. Commissioner, 73 T.C. at 766 (1980) The issue is ultimately one of fact in which the scope of a taxpayer's activities, either personally or through agents, in connection with the property, are so extensive as to rise to the stature of a trade or business."
Bauer v. Commissioner, 168 F.Supp. 539, 541 (Ct.Cl.1958).
Qualified real property business indebtedness is defined as indebtedness that meets all of the following requirements:
There are two limitations, (1) the debt in excess of value and (2) the overall limitation on the amount of discharged qualified real property business debt that can be excluded from gross income under IRC §108(c)(2) and further described in Treas. Reg. §1.108-6.
In applying the first limitation, the amount of qualified real property business indebtedness excludible from gross income cannot exceed the excess of the outstanding principal amount of the qualified real property business debt (immediately before the discharge) over the fair market value (immediately before the discharge) of the business real property that secures the discharged debt, less, the outstanding principal amount of any other qualified real property business debt that secures the property immediately before the discharge.
In applying the second or overall limitation, the excluded debt amount should not be more than the aggregate adjusted bases of depreciable real property held immediately before the discharge, (excluding depreciable real property acquired in contemplation of the discharge) reduced by the sum of depreciation claimed for the taxable year that CODI was excluded under this exclusion plus, reductions to the adjusted bases of depreciable real property required under IRC §108(b) (e.g., bankruptcy or insolvency exclusions) for the same taxable year plus, reductions to the adjusted bases of depreciable real property required under IRC §108(g), the qualified farm exclusion, for the same taxable year.
The qualified real property business exclusion is an election by attaching a Form 982 to a timely filed tax return (excluding extensions) or an amended return filed within six months of the due date of the tax return (excluding extensions). Failure to do so disqualifies the taxpayer from excluding cancellation of debt income from gross income under this exclusion. As such, a taxpayer must make a formal request for a Private Letter Ruling when the taxpayer later discovers that he/she qualifies for this exclusion during an examination. The examiner cannot make the determination when the taxpayer did not make a timely election.
Rev Ruling 2016-15
In Rev. Rul. 2016-15, the IRS ruled on two situations involving individual taxpayers who had debt forgiven on property used in their real property trades or businesses. In the first, the taxpayer was able to defer the gain on debt forgiven on the real property indebtedness, while the second taxpayer was not.
The first situation discussed in the revenue ruling involves an individual who borrowed $10 million from a bank and used it to build an apartment building for use in the taxpayer’s rental trade or business. Before the loan matured, the taxpayer reduced the loan principal to $8 million but was unable to pay it off on the maturity date. The fair market value of the building was $5 million, and the taxpayer’s adjusted basis was $9.4 million. The bank agreed to accept $5.25 million to forgive the loan. The taxpayer was not insolvent or bankrupt when the loan was forgiven. The taxpayer elected to exclude $2.75 million under Sec. 108(a)(1)(D).
Because the taxpayer held the property for use in a trade or business and was allowed to depreciate the property, the debt is qualified real property indebtedness and the taxpayer can exclude the gain from gross income and reduce the basis in the building.
In the second situation, the taxpayer borrowed $10 million to construct a residential community, which the taxpayer subdivided and held for sale. The rest of the facts are the same, and the taxpayer wants to exclude the $2.75 million of forgiven debt from gross income. But, because the qualified real property indebtedness rules require a corresponding reduction in the basis of the property, they cannot be applied to property that is not depreciable in the taxpayer’s hands, which is the case for property primarily held for sale to customers. Therefore, the second taxpayer does not qualify to exclude the income under Sec. 108(a)(1)(D).
In addition, the IRS announced that it was obsoleting Rev. Rul. 76-86, which held that a taxpayer could exclude income arising from indebtedness incurred to buy merchandise for resale. The IRS explained that it was obsoleting the revenue ruling because the current versions of Secs. 108 and 1017 are materially different from the versions in effect when it was issued; thus, the revenue ruling no longer reflects current law.
This clarification appears to have helped landlords with sudden decreases in property values.
1099-C identifiable event codes were added to the 1099-C reporting form in 2013 for 2012 1099-C forms issued.
What Is Form 1099-C?
Form 1099-C is an information return used to report canceled debt to debtors for tax purposes. A debtor does not have income when an amount is borrowed. But, if the debtor does not pay the loan back and the bank forgives part of the loan, then the forgiven portion of the debt constitutes taxable income to the debtor. For example, if a customer takes out a loan for $100 and the bank agrees to discharge the loan for $75, then the customer would have $25 in forgiveness of debt income. Form 1099-C is generally used to report this forgiven debt income. The debtor will generally owe taxes on forgiven-debt income unless the debtor is able to claim an exception from taxation,
such as for insolvency.
When Do Banks Issue Form 1099-C?
Lenders are generally required to issue Form 1099-C after certain trigger events on a debt. These events are identified in tax regulations. Common trigger events include:
Which Code to Use on Forms 1099-C Issued ?
The new codes for trigger events appear in the 2012 and later instructions for Form 1099-C. Brief explanations of each code are set forth within the instructions under the section labeled "When Is a Debt Canceled." The new codes will be input on Forms 1099-C in Box 6 labeled "Identifiable Event Code."
Publication 4681 identifiable event code explanations
Code A — Bankruptcy. Code A is used to identify cancellation of debt as a result of a title 11 bankruptcy case.
Code B — Other judicial debt relief. Code B is used to identify cancellation of debt as a result of a receivership, foreclosure, or similar federal or state court proceeding other than bankruptcy.
Code C — Statute of limitations or expiration of deficiency period. Code C is used to identify cancellation of debt either when the statute of limitations for collecting the debt expires or when the statutory period for filing a claim or beginning a deficiency judgment proceeding expires. In the case of the expiration of a statute of limitations, an identifiable event occurs only if and when your affirmative defense of the statute of limitations is upheld in a final judgment or decision in a judicial proceeding, and the period for appealing the judgment or decision has expired.
Code D — Foreclosure election. Code D is used to identify cancellation of debt when the creditor elects foreclosure remedies that statutorily end or bar the creditor's right to pursue collection of the debt. This event applies to a mortgage lender or holder who is barred from pursuing debt collection
after a power of sale in the mortgage or deed of trust is exercised.
Code E — Debt relief from probate or similar proceeding. Code E is used to identify cancellation of debt as a result of a probate court or similar legal proceeding.
Code F — By agreement. Code F is used to identify cancellation of debt as a result of an agreement between the creditor and the debtor to cancel the debt at less than full consideration.
Code G — Decision or policy to discontinue collection. Code G is used to identify cancellation of debt as a result of a decision or a defined policy of the creditor to discontinue collection activity and cancel the debt. For purposes of this identifiable event, a defined policy includes both a written policy and the creditor's established business practice.
Code H — Expiration of nonpayment testing period. Code H is used to indicate that the creditor hasn't received a payment on the debt during a testing period ending on the tax year of the 1099-C. The testing period is a 36-month period increased by the number of months the creditor was prevented from engaging in collection activity by a stay in bankruptcy or similar bar under state or local law. This identifiable event applies only for a creditor that is a financial institution or credit union (and certain of their subsidiaries), the FDIC, the RTC, the NCUA, any other federal executive agencies, and any successor or subunit of the FDIC, the RTC, the NCUA, or a federal executive agency.Expiration of the nonpayment testing period doesn't necessarily result from an actual discharge of indebtedness.
Code I — Other actual discharge before identifiable event. Code I is used to identify an actual cancellation of debt that occurs before any of the identifiable events described in codes A through H.
Form 1099-C Reference Guide for Box 6 Identifiable Event Codes
A - Bankruptcy
B - Other judicial debt relief
C - Statute of limitations or expiration of deficiency period
D - Foreclosure election
E - Debt relief from probate or similar proceeding
F - By agreement
G - Decision or policy to discontinue collection
H - Expiration of nonpayment testing period
I - Other actual discharge before identifiable event
What do I do if I receive a Form 1099-C?
Filing form 982 with your tax return with a proper exception code will eliminate the extra tax caused by reporting 1099-C as income. The only other alternative is to report the income on page 1 of your form 1040 as income. Using form 982 can be difficult and you may want to consult a profession tax
preparer before you file this tax form on your own.
John Oliver does comic thorough show on the debt buyer and collection industry. The fact that a bank can write off debt and issue a 1099-C and then an unlicensed debt collector can still collect in full the debt is not right.
The IRS assumes income reported on form-1099-c is taxable unless specifically excluded by the taxpayer on a properly filed tax return.
Oliver dug into the seamy underbelly of the largely unregulated debt-buying industry, revealing how in many states, you can purchase and collect consumer debt with no license. To illustrate how ”disturbingly easy” it was to establish a debt-buying company, Oliver did just that, forming Central Asset Recovery Professionals, or CARP (after the bottom-feeding fish) in Mississippi via the internet.
Soon after CARP was formed, it was offered the chance to purchase $15 million in out-of-statute medical debt (meaning the debt was technically too old to be collectible under state law) for $60,000. CARP pulled the trigger, and along with the debt, acquired the names, current addresses and social security numbers of the nearly 9,000 debtors included in the portfolio, meaning Oliver was free to now pursue the owing parties in any way he saw fit.
Instead, Oliver chose to forgive the $15 million in debt, freeing 9,000 people from the threat of late-night phone calls and empty lawsuits, while simultaneously one-upping Oprah in the process by achieving the largest monetary giveaway in TV history. The full video can be seen above or on utube.
Visit the charity that facilitated John Oliver's $15 million giveaway. RIP Medical Debt.