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The tax form everyone fears

The 1099-C, which comes to taxpayers who have settled debts in the past year, can be scary. But it's possible the form was sent by mistake or that you don't have to pay.

By Money Staff Jan 14, 2014 12:42PM

This post comes from Christine DiGangi at partner site on MSN MoneyIf 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 Internal Revenue Service 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, director of consumer education. "If you couldn’t pay the debt, what makes the IRS think you can pay the taxes?"

Close up of hands filling in tax form © JGI, Blend Images, Getty Images

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 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 an understandable first reaction). 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'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.

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Jan 14, 2014 3:22PM
Many posters here have an incorrect impression and should re-read the article.  Many times the forgiveness of debt reported on a 1099C is not taxable.  If you receive one you should consult an experienced tax advisor.
Jan 14, 2014 1:33PM
Get it over with --- Form FU -

line 1:  How much income did you make ?
line 2:  Send it.

Jan 14, 2014 2:37PM

I can hardly wait for all the Obama care supporters to have the IRS knocking on their doors telling them that their subsidized premiums are taxable or that their employers share of healthcare insurance coverage is now considered earned income.

Regardless, like a recent commercial about some banks going after more fees, a gal gives her boss customer complaints about fees and sarcastically asks why not have a fee for charging fees. The bosses eyes immediately light up thinking about the possibilities.

Jan 14, 2014 3:01PM

The IRS is kicking folks when their down, lose everything and be in debt to the government for your losses.  What a crock of sh!t.

Jan 14, 2014 4:42PM

Tax on a loss. Only a democrat could dream that crap up.


Jan 14, 2014 3:08PM
Just another way to keep people heavily in debt, be it with debts owed or unpaid or with the IRS.
Jan 14, 2014 5:36PM
Knock it off with the nonsense.  This is not a new form or issue.  It didn't originate in the last year and it is not to pay for Obamacare.   The rather inordinate amount of forgiveness of mortgage debt has propelled this item to the forefront.  How many that reply to this site file anything other than short form?  Or have a business in Sub chapter S?  or are in a dba situation?
Jan 14, 2014 12:58PM
As soon as President Kool Aid is out of Office, America will go back (regardless of the Statute of Limitations) and go after every LOSER who walked or settled on credit debt that had the income to abide by terms and obey the contract. Way too many walked from one home to buy uptown and racked up credit cards on false impressions of privilege. When the dust settles, we'll see that there were desperate cases and abusers. You signed on the line, what were you... blind? Or STUPID? 
Jan 14, 2014 2:26PM

One thing that Ms. DeGangi fails to mention is that the tax that the IRS wants is far less than the original forgiven loan. Like any credit card company, the IRS will surely set up an easy pay plan.

Maybe the IRS will one day offer their own debt forgiveness plan? I doubt it though.

Jan 14, 2014 4:33PM
What would happen if everyone, in unison, stopped fearing tax time and just ignored it altogether?  How many Americans can they store in the FEMA camps already staffed? How many more can they store in the FEMA camps by staffing those not staffed?  They could store hundreds of thouseands, I am sure.  But, could they store more than 300 million?
Jan 14, 2014 4:36PM
Since I never received the obo giveaway I have nothing to fear.
Jan 14, 2014 3:50PM
Our Master's, the Oligarchy, desire to control us, must control us, need to control us and ,heaven forbid, if they fail to control us: then they like Pete's Dragon go POOF!!!!
Jan 14, 2014 8:13PM
When creditors forgive your loans, they are effectively giving you the money to pay the loans. THAT is why Congress decided to treat forgiven loans as income. (And yes, sometimes the creditor is the U.S. Treasury.)
Jan 14, 2014 5:59PM

you'll need an expert on this, but generally if you can show you were insolvent at the time the lender forgave the amount owed on your home loan (and it was your primary residence that was foreclosed on), the irs will forget the tax due.


but another example of how the irs bleeds people with little left dry.


because it's a lot easier for the irs to get a little bit of money from a lot of poor people than it is to collect money from a much smaller group of rich people - who can afford tax professionals to limit their federal tax liability.

Jan 14, 2014 7:33PM
My last comment - if you get a 1099-C, pay attention to the last paragraph above.  There are certain circumstances in which lenders are required by tax law to issue a 1099-C EVEN WHEN THE DEBT HAS NOT BEEN FORGIVEN.  Don't assume you don't still owe the debt just because you received this form.
Jan 14, 2014 8:05PM
 Fear oh that's just for republicans girls as leech democrats we celebrate welfare application day.
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