What To Tell Your Accountant If You Get A 1099-C
By G. Dezenberg & Smith, Attorneys At Law, Jr., Attorney At Law
A 1099-C “Cancellation Of Debt” 1099 is not a document you are supposed to get if you discharge a debt in Bankruptcy. Unfortunately, some misinformed creditors send these out because of ignorance, or malice, and you may find yourself with an accountant telling you that you have to include the “forgiven” debt as income. THIS IS INCORRECT! If Debt is Cancelled in Bankruptcy, or if you Settled Debt just prior to filing for Bankruptcy, then the “income” reported on a 1099-C that you receive does NOT have to be included in income on which you pay taxes. Go to www.irs.gov and pull up Publication 908 (Bankruptcy Tax Guide) or Publication 4681 (Cancelled Debt) or read on below…….
- Debt Discharged in Bankruptcy. If you have debt that was discharged in Bankruptcy, and you receive a 1099-C “Cancellation of Debt” from a Creditor, you will need to file Form 982 with your tax return. You will check box 1 (a) “Discharge of indebtedness in a title 11 case” and at 2 you will put in the amount of “income” reported on the 1099-C. In Part II you will list this amount again under number 5. You will then file your tax return as normal.
- Debt Settled Before You Filed Bankruptcy. What if you settled debt before you filed Bankruptcy and then realized you were in over your head. Not to worry, the IRS has an exception to having to report “cancelled debt” as income (if you receive a 1099-C) that states if you were insolvent when the debt was settled (you had more debt than assets) then you can exclude the cancelled debt from income on your tax return. Filing Bankruptcy shortly after settling debt is almost conclusive proof that your debts exceeded your income (although the IRS has a worksheet it encourages you to use). You will file Form 982 with your tax return and check box 1 (b) “Discharge of indebtedness to the extent insolvent (not in a Title 11 case)”. You will then list the amount of income reported on the 1099-C on line 2. In Part II you will list this amount again under number 5. You will then file your tax return as normal.
DO NOT PAY THE IRS MONEY IT IS NOT ENTITLED TO. PLEASE PROVIDE YOUR ACCOUNTANT OR TAX PREPARER PUBLICATION 908 OR PUBLICATION 4681 FROM THE IRS WEBSITE. IF THEY HAVE ANY QUESTIONS PLEASE HAVE THEM CALL ME at 256-533-5097.