1099 Tax Software Blog

Individuals or business entities who borrow money from a lender whether it be a lending institution for the purchase of a property may be required by the lending entity to secure the loan by the property being purchased. Should an individual then go ahead to transfer an interest in the secured property to the lending entity as the case would be in a foreclosure, or should an individual abandon the property, he or she may be required to treat the transfer or the abandonment as an actual sale of the property in question. Should the lending entity acquire an interest in the secured property or have a reason to know that you abandoned the property, the lending entity is required to send you a Form 1099-A for the acquisition or the abandonment of a secured property.

When an individual borrows money, he or she is not required to include the proceeds of the loan in gross income. This is because the borrower has an inherent obligation to repay the lender at a later date. Should that obligation be cancelled, the borrower is required to include this cancelled debt in gross income. When a commercial lender cancels a debt, the lending body will disburse a Form1099-C with regard to the cancellation of debt. This is the official method of reporting the debt cancellation.

The form 1099-A reports the principal amount owed to the lender as well as the fair market value of the property secured. This is then used by the debtor in determining whether there is a gain or loss in the property disposition. The form 1099-C reports the cancelled debt by the lender. The Form 1099-C may be used singly, if the interest of the lender in the secured debt or the abandonment of the property by the debtor as well as the cancellation of the debt all happen within the same calendar year. Should the borrower receive Form 1099-C or Form 1099-A with incorrect information, one should contact the lender in order for him to make the necessary corrections. Failure to do this could lead to penalties being imposed on your for providing the incorrect information or you could end up being short changed in the long run.

There are some circumstances that may call for the cancellation of debt income wholly or partially.  One such case is whereby you have a debt income cancellation on ones principal residence. Here one may be allowed to exclude the whole amount or part of the amount that is cancelled from your income. This is provided for expressly in the Mortgage Forgiveness Debt Relief Act of 2007.

As of April 2014, American households owed $11.68 trillion in debt, which is up 3.7% from last year.

With so many jobs lost and so many people having to take lower paying jobs, there is often not enough money in a household budget to pay these debts. Sure, a household can declare bankruptcy, but that might be overkill, if there are only a couple of accounts that the family is past due on.

Enter the collection agents. They call you, and call you, and call you. You make payment agreements, you pay them some money, but the fees and the interest charges keep ballooning the amount due.  Finally, someone offers you a deal: You pay us $3000 and we’ll forgive the remaining $7000.

You scrounge around and come up with the money, glad to be off the hook for the debt, glad to not be getting the day and night phone calls. Relief!

Then January comes and you get this form in the mail, this 1099-C. You have no idea what it is or why you have it or what you’re supposed to do with it.

Well, guess what. The collection agent never told you this, but the amount of debt that was forgiven, the $7000, has now been declared income to you. The thinking is that you benefitted by that amount, and you shouldn’t get that for free. So, the amount that was forgiven now has to be added to your tax return as income and you have to pay taxes on it.

Here’s the trick, when you get one of these. It is called form 982, Reduction of Tax Attributes Due To Discharge of Indebtedness. Don’t let the name of the form scare you. What you really want is the worksheet that goes with the form.

This worksheet has two sections: assets and debts. There is a date on the 1099C, which is the date the original debt was cancelled. As of the day before that date, you list the values of what you owned and the amounts you owed (including the debt that would be cancelled the next day.) You’ll have to estimate some things, like the values of your furniture and books and jewelry. Just do the best you can. Other things, like the value of your cars, you can look up online. You can also look up how much money was in your bank accounts that day and how much you owed on other credit cards or your mortgage.

When everything is laid out on the form, you subtract the total value of your assets from your total debt. If the amount that remains is debt, and it is more than $7000, then your financial situation as of the date of cancellation was that you were insolvent, even if you were not in bankruptcy. That means you don’t owe any taxes on the $7000 that was cancelled. Pretty neat, huh?

So, you enter the amount of your insolvency on the 982 and include it with your tax return. Voila! Off the hook again!!

IRS Form 1099-C is used by creditors (such as the federal government, banks or other financial institutions, credit card companies, or credit unions) to report debts that are cancelled to debtors that exceed $600.

The debtor is required to include this amount as income. If the debtor had a debt written off and did not receive a 1099-C form, it is likely that the form was still reported to the IRS, and the creditor should be notified.

Not every type of forgiven debt is considered to be taxable by the IRS.  Although a 1099-C form is still required to be submitted to the IRS by creditors for all debts written off that exceed $600, the debtor in some situations is not required to report the cancelled debt as income.

For example, the Mortgage Forgiveness Debt Relief Act of 2007 allows certain exemptions for reporting forgiven debt relating to foreclosed homes.  If the cancelled debt was intended to be a gift, the debtor is not required to report it as income.  Any debt that was discharged in a Chapter 11 bankruptcy would be excluded from reporting requirements.  If you are insolvent, or if your debts exceed the value of your assets before the creditor agreed to write off your debt, you are not required to report that cancelled debt as income on your tax return.

1099-C forms are required to be submitted to the debtor by January 31.  The deadline for paper filing to the IRS is typically the end of February.  If you decide to efile, you have an additional month to submit the data; the deadline for efiling is typing the end of March.  You can request an 30-day extension online taking the due date to the end of April.

1099-C software at 1099fire.com creates original, replacement and corrected files in the format required by the IRS for electronic transmission. The system is updated each year to reflect the format changes that are made by the IRS.

You can file electronically whether you have just one information return or millions.  The IRS encourages everyone to file electronically and requires businesses with more than 250 information returns to electronically file.

IRS Form 1099-C is used to report Cancellation of Debt.  Lenders use Form 1099-C to report to the borrower and the IRS that a debt of $600 or more has been canceled or forgiven.

Form 1099-C is an important form for the debtor.  If a creditor has discharged a debt owed by the borrower, then the borrower is required to include the forgiven debt on the “Other income” line of their 1040 form, even if the amount is less than $600.

The top part of Form 1099-C asks for the creditor name, address and then TIN.  This is followed by the debtor name, address and TIN.

There are 7 boxes on Form 1099-C.  Each box is discussed below:

Account number.  This is just a unique number the creditor uses to distinquish the borrower.

Box 1. Shows the date of the identifiable event.

When I think of the words “identifiable event”, I say to myself “what started it all”.  The borrower might have filed bankruptcy, was foreclosed on or the debt reached a statue of limitations on a certain date.  Box 1 shows the date the earliest identifiable event occurred or the date of an actual discharge.

Box 2. Shows the amount of debt discharged.  This is an important box for the borrower because it is the amount the borrower is required to show on their 1040 and will be treated as income.  If the borrower disagrees with this amount, then they should contact the creditor.

Box 3. Shows the interest if included in Box 2.

Box 4. Shows a description of the debt or property.

Box 5. Shows whether the borrower was personally liable for repayment of the debt when the debt was created or at the time of the last modification.

Box 6. Shows the identifiable event code. The codes are: 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; or I – Other actual discharge before identifiable event.

Box 7. Shows the fair market value of the property.

Copy B of IRS Form 1099-C is sent to the borrower by the end of January.  Copy A of Form 1099-C must be paper filed along with Form 1096 by the end of February or the creditor can electronically file Copy A by the end of March. Copy C is retained by the creditor for their records.