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Old 03-11-2015, 02:28 PM
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Reporting Cancelled Debt as Income

Hello,

I settled a debt for $500 (the original debt owed was $1,900). I assumed that I would receive a 1099-c for the cancellation of debt, but I never did.

I called the debt collector and asked if they had sent sent out a 1099-c in regards to my debt cancellation, and they told me that they had not and will not because the debt does not qualify for a 1099-c. They didn't have an answer as to why it does not qualify. They also informed me that they did not submit a 1099-c to the IRS.

I'm pretty sure that I still need to report this as income for 2014, but I have not official document stating the amount of cancelled debt, date, etc. How do I submit this as income? Is it something I should worry about? Thanks for any help. I appreciate it!

Best,

Ed



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Old 03-12-2015, 01:18 AM
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Join Date: Oct 2010
Posts: 5,230
Quote:
Originally Posted by edro19 View Post
Hello,

I settled a debt for $500 (the original debt owed was $1,900). I assumed that I would receive a 1099-c for the cancellation of debt, but I never did.

I called the debt collector and asked if they had sent sent out a 1099-c in regards to my debt cancellation, and they told me that they had not and will not because the debt does not qualify for a 1099-c. They didn't have an answer as to why it does not qualify. They also informed me that they did not submit a 1099-c to the IRS.

I'm pretty sure that I still need to report this as income for 2014, but I have not official document stating the amount of cancelled debt, date, etc. How do I submit this as income? Is it something I should worry about? Thanks for any help. I appreciate it!

Best,

Ed
Even if you did not receive a Form 1099C, you must report canceled debt as gross income on your tax return on 1040 line 21 as other income unless one of the exceptions or exclusions applies to you. Any time that you have a lender who forgives or cancels a debt that you owe, the IRS requires that they send you a 1099-C to report the amount of debt that was cancelled. Lenders must send you a Form 1099-C if more than $600 in debt you borrowed was either canceled or forgiven by a lending institution. Under federal law, you are required to still claim forgiven debt of less than $600 as income on your taxes but you will not receive a Form 1099-C in that situation.This then becomes taxable income to you. I realize that it is not really income, in the sense that you earned money, but in the eyes of the IRS it is treated as income since you received something in the form of goods or services or cash which you did not have to repay.When the lender issues the 1099-C form, a copy is also sent to the IRS which is how they know this was not reported on your return. It's possible that your copy of the 1099 was lost in the mail or perhaps sent to the wrong addressor etc, but in any case, you will now have to deal with this situation. When you have a cancellation of debt, there are really only two ways you can avoid paying tax on the this. One is if the debt was discharged through a bankruptcy filing.The only other option(as you said this is NOT your situation) is if you can show that you were insolvent at the time the debt was forgiven, meaning that at the time this happened your liabilities were more than your assets. In order to claim insolvency and not pay tax on the debt which was forgiven, you must file Form 982 with the IRS



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