Home > Taxes > The Tax Form Everyone Fears

Comments 0 Comments

If you settled an outstanding debt in 2013, you may have more paperwork to fill out.

Creditors who forgive debts of $600 or more are required to file a Form 1099-C Cancellation of Debt, because the IRS says you must include canceled debt in your gross income. You then have to pay taxes on that so-called income, unless you qualify for an exception.

“Getting a 1099-C to pay taxes on a debt you couldn’t pay in the first place is terrifying,” said Gerri Detweiler, Credit.com director of consumer education. “If you couldn’t pay the debt, what makes the IRS think you can pay the taxes?”

Understanding the 1099-C

The IRS estimates more than 5.7 million 1099-C forms will be filed for tax year 2013 (some consumers may receive more than one), but not everyone with a canceled debt receives one. Regardless, you still need to deal with the form if you’ve settled debt for less than you owed, sold your home in a short sale for less than it was worth, went through foreclosure on a home worth less than what you owed on it, or if you didn’t pay anything on a debt for at least three years and there was no collection activity in the past 12 months.

Whether or not you have to pay those taxes depends on a few things, Detweiler says, and the key to determining if you qualify for an exemption lies in Publication 4681, which includes a worksheet to help you determine if you were insolvent right before the debt was canceled.

What to Do With a 1099-C

Sometimes consumers receive 1099-C forms in error, whether it’s related to an old debt or that the form is incorrect in some way. There’s not really a simple strategy for confronting such problems, Detweiler said.

“The IRS doesn’t make it easy,” she said. “If you have to dispute it, there’s not really a specific form for doing so. I recommend consumers get professional help in those cases.”

If you think you qualify for an exemption, it can be addressed with IRS Form 982 Reduction of Tax Attributes Due to Discharge of Indebtedness.

Try not to freak out when you get a 1099-C (though that’s a logical first reaction when you receive one). It helps to regularly look at your credit reports to take stock of your debt — all consumers are entitled to one from each of the three major credit bureaus for free each year — and you can see how debts impact your overall credit health by analyzing your profile using a free tool like Credit.com’s Credit Report Card.

Another thing about 1099-C forms — they don’t mean the debt is forgiven, which is a common misconception, Detweiler said. Make sure you take care of them as soon as possible, because these tax bills could be upwards of tens of thousands of dollars.

“It’s daunting,” Detweiler says.

More on Managing Debt:

Image: diego_cervo

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

Credit.com receives compensation for the financial products and services advertised on this site if our users apply for and sign up for any of them.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team