Kentucky residents who have unsecured debt like medical bills or maxed out credit cards may want to learn about the 1099-C form. The 1099-C ‘cancellation of debt” form is an IRS document that is sent to individuals after some types of debts are either canceled or forgiven. Although former debtors may think they owe nothing once a debt is resolved, they might owe something to the IRS during tax season.
According to the IRS, debts that are canceled or forgiven are considered income. If a debtor was able to resolve an unsecured debt for at least $600 less than what they owed, the creditor is obligated to file a 1099-C form with the IRS. The debtor will then have to report the canceled or forgiven debt on their federal income tax return in the income section.
Many individuals disregard the 1099-C form when they receive it in the mail because they don’t understand what it is. If the canceled debt is subsequently not reported as income, taxpayers may unwittingly put themselves at risk for an IRS audit. However, debtors may not be obligated to report canceled debt as income if they meet certain requirements. A debtor may benefit from gaining an understanding of how tax laws involving cancellation of debt affect their specific situation.
Individuals with unsecured debt issues might want to consult an attorney to determine the best course of action. While looking for ways to resolve debts, an attorney may be able to help ensure that a person’s discharged debt won’t be replaced by a tax bill that they cannot afford.
Source: CreditCards.com, “1099-C surprise: IRS tax follows canceled debt“, Connie Prater, November 09, 2014