Understanding IRS Forms: 1099-C

A 1099-C form is used for reporting debt cancellation as income to the Internal Revenue Service (IRS) and the individual or entity receiving the canceled debt. It is crucial for tax reporting and compliance. Key aspects of this form include information that affects an individual’s annual tax return and when to file or send it out.

Whether you are a creditor navigating debt forgiveness or a debtor managing your taxable income from canceled accounts, understanding the intricacies of this form will help you handle it correctly.

What Is on Form 1099-C?

Creditors or lenders will file Form 1099-C if they cancel or forgive a debt of $600 or more. Key elements of this form include:

• Identification information: Form 1099-C has information about the creditor, who is canceling the bill, and the debtor, whose dues are canceled. The information includes taxpayer identification numbers (TINs), names and addresses. There is also a section for identifying information like the account number and cancellation date that will help to determine the debt marked for cancellation.
• The amount canceled: Box number two on this form reports the total amount being canceled during the relevant tax year. Canceled debt is seen as taxable income unless an exclusion or exception applies. The amounts reflected on this document may include late fees, interest, fines and penalties.
• Reason for cancellation: Looking at box six, you will see a code indicating the reason for the financial obligation cancellation. Often, this extends to bankruptcy, foreclosure of a sale or insolvency. 
• Exclusions and exceptions: The IRS excludes some forgiven debts from taxable income while others may qualify for an exemption. Boxes five and seven contain more information about whether exclusions and exemptions apply.
• Taxpayer responsibility: The entity or individual who receives Form 1099-C is responsible for reporting the canceled debt income on their tax return. You may need to include this amount on your tax return and then determine if any exclusions or exceptions apply.

Note that all student loan forgiveness from January 1, 2021, to December 31, 2025, is completely tax-free. Since this debt cancellation does not count as taxable income, you will not see your student loan debt on Form 1099-C.

Who Can File Form 1099-C?

Since Form 1099-C is a cancellation of debt form, the creditor will fill it out when they forgive or cancel an individual or entity’s financial obligations. Creditors or lenders who cancel or forgive an outstanding amount owed to them by an individual or entity may file Form 1099-C. The lender will file Copy A, retain Copy C for their records and send you Copy B. Typically, these entities may have to file this form:

• Creditors: Any entity that extends credit or lends money may have to file Form 1099-C if they cancel a bill owed to them. This includes individuals who lend money and businesses that provide goods or services on credit.
• Financial institutions: Credit unions, banks and other financial institutions file this form if they forgive capital owed by a borrower, including mortgage debts, personal loan debt or credit card debt.
• Government agencies: Any government agency can cancel dues owed to them, which often includes student loans and unpaid taxes. These credits require filing Form 1099-C.

How to File Form 1099-C on Your Tax Return

If you receive this form, you must report the indicated amount into Schedule 1 of Form 1040 as other income. Once you have filled out Schedule 1, record your adjusted income in line 10 or Form 1040 or 1040-SR. If you are aware of cancellation under $600 on your behalf and you do not receive Form 1099-C, you still have to report it. While you do not need to submit Form 1099-C, you should hold onto it for your records. 

Use IRS Form 982 to find out how much of your canceled debt you can exclude from your gross income.

What if There Are Discrepancies on the Form?

Ensure that all the details on your form are correct. Contact the lender immediately if you note any discrepancies, as they need to make amendments and send you an updated form. You should also contact the lender if you know you should receive For 1099-C but it does not arrive in time. If you file your taxes and the form arrives after that, file an amended tax return regardless of its effect on your tax bill. 

While there is a statute of limitations on old debt, it’s important to note that Form 1099-C has no statute of limitations, so you may receive or send out this form relating to very old financial obligations. Contact a tax and accounting professional if you receive a copy of this form for an old debt.

What Are the Consequences of Not Reporting Form 1099-C?

Failing to report Form 1099-C, whether on your annual income tax or as an organization, can have several consequences:

• Penalties: You may receive penalties, which can add up over time and result in significant financial consequences.
• Tax benefit loss: Failing to report this forgiveness or cancellation can lead to the loss of tax benefits or credits you may otherwise be eligible for, further impacting your tax liability.
• Tax liability increase: As canceled debt income is generally taxable, not reporting it can incur additional taxes.
• IRS audits: The IRS may audit you or your business for not reporting canceled debt income, which may lead to additional interest, penalties and taxes.
• Legal consequences: Non-compliance with tax reporting can lead to civil penalties and fines. In some cases, it is seen as tax evasion, which is a criminal offense.

While failing to report this form can have significant long-term financial and legal ramifications, partnering with the right tax professional can help you navigate the process efficiently.

Get Professional Tax Resolution With Polston Tax

If you receive Form 1099-C, carefully review the information and file it with your annual income taxes. Consulting with a tax professional will help you navigate the nuances of your debt cancellation and ensure legal compliance.

With over 100 years of combined experience, the Polston Tax Resolution and Accounting professionals are ready to help you navigate Form 1099-C and more. We can represent you in tax audits, planning and preparing for your obligations to the IRS. For more information, contact us today, and a team member will reach out to answer your questions or schedule your complimentary consultation.