If you are a self-employed worker you will receive a 1099 for your wages instead of a W-2 form. But there is another type of 1099 that you may receive from one of your creditors. This is form 1099C. A 1099C form is used when all or a portion of a debt is canceled or forgiven by the creditor. If the amount exceeds $600.00 a creditor must report this debt forgiveness to the IRS. The IRS counts the forgiven or cancelled debt as income that must be reported on your tax return.
You should receive a copy of the 1099C form in the mail from your creditor(s) when they file the form with the IRS. You may not have gotten a copy. If not, the IRS will send you a notice stating you failed to include income on your tax return as a result of a creditor filing the 1099C form. Now you owe taxes, penalties and interest on the amount.
But wait, there are reasons why you may not have to pay taxes on this canceled debt. Here are some of the exceptions listed in IRS Publication 4681 that would relive you of the taxes, penalties and interest.
- The debt resulted from the foreclosure of your residence
- The debt was discharged in bankruptcy
- The debt resulted from the modification of your home loan under the Homeowners Affordable Modification Program (HAMP)
- It was a qualified farm debt
- The debt would have been a deductible payment
- The debt was cancelled as a gift to you or a bequest in a will
If one of these exceptions applies to you it should be listed on IRS Form 982 and filed with your tax return to keep you from owing taxes on the debt.
Here is what you need to do. Make sure your tax preparer knows you filed bankruptcy and have them attach IRS Form 982 to your tax return. They should check the box in Part 1 that says “Discharge of indebtedness in a title 11 case”. Title 11 is bankruptcy. Attach a copy of your bankruptcy discharge to the form 982.
If you have already filed your tax return when you receive the 1099C, then you will need to file an amended return. Do not ignore these forms. Deal with it now, otherwise it will cause you problems in the future.