Form 1099-C is one of the forms that you need to fill out and submit for the cancellation of debt. If your forgiven or canceled debt is more than $600, the entity needs to file form 1099-C. It is one of the least known International Revenue Service forms, and most people are often shocked when they receive this form.
If you are one of these people and are looking for more information, have no worries! We are going to cover the most important details you need to know about Form 1099-C. Below, you can learn more about what you need to do when you get this form and whether your debt will be excluded or not from the debt settlement taxes.
What is Form 1099-C?
If your lender cancels your taxable debt and the amount is $600 or more, then the lender needs to file Form 1099-C with the IRS. While filing the form, the lender also needs to send you one copy of the form. In this way, you can use it while filing your annual taxes to be exempt from that amount of tax.
On the other hand, if your debt is not in any excluded categories, then you may owe a debt forgiveness tax to the IRS. Form 1099-C is also known as the Cancellation of Debt form, and if you wonder what cancellation of debt does, then keep reading!
What Is Cancellation of Debt?
In fact, this term is pretty straightforward. It means that the debt you had is canceled. For example, if you contact your bank to negotiate a debt settlement for your credit cards, your credit card debt may be forgiven. In this case, you can expect to receive the 1099-C form.
Other examples can be student loans, mortgages, or foreclosures of your home. All of these canceled debts will end up you are receiving the form that you need to provide while filing your annual taxes.
What Should You Do When You Get Form 1099-C?
Firstly, you need to keep it in a secure place since you will need it while filing your annual taxes. In case you work with a professional for your taxes, then make sure that you inform them about the form and provide them with a copy of it.
You also need to file Form 982 to exclude the canceled debt from your taxable income as well. In this way, you can decrease your tax burden, but keep in mind that not all canceled debts are excluded from taxable income.
What to Do If Your Cancelled Debt is Less than $600?
You still need to take action to report it to the IRS. However, this time you need to fill the form 1040 to report it as your income. It may be challenging to learn whether your canceled debt will be excluded from your tax or not. In these cases, we recommend visiting the IRS official website or contacting a tax professional to avoid any possible mistakes.
What to Do If Your Cancelled Debt is Incorrect?
We are all human, and we can all make mistakes. If you believe that your 1099-C form is incorrect, then you need to contact the debt collector or creditor first. All you need to do is ask for the correct 1099-C form. However, if you cannot get the new copy somehow, then you need to contact the IRS.
You can file a Form 1099-C Complaint. In this way, the IRS will contact the debt collector or creditor for the correction. This will let you resolve the dispute, but it will take time compared to the first method. Therefore, we always recommend contacting the debt collector or creditor first before you file a form to the IRS.