Form 1099-C: Cancellation of Debt (2020 Tax Year)

What the Form Is For

Form 1099-C, Cancellation of Debt, is an information return that you receive when a lender or creditor forgives or cancels $600 or more of debt you owed. Think of it as a financial institution's way of telling both you and the IRS that they've stopped trying to collect money you borrowed and never fully repaid.

When you receive a Form 1099-C, it means an "identifiable event" has occurred—such as a bankruptcy discharge, foreclosure, loan modification, or the creditor's decision to write off your debt. The critical point to understand is that forgiven debt is generally treated as taxable income by the IRS. Why? Because you received a benefit (the borrowed money) but didn't have to pay it back, which puts you in a better financial position than before—similar to earning income.

Who sends these forms? Applicable financial entities including banks, credit unions, federal agencies (like the Federal Deposit Insurance Corporation), credit card companies, and any organization whose significant business involves lending money. For 2020 returns, creditors had to send Copy B to debtors by February 1, 2021, and file Copy A with the IRS by March 1, 2021 (March 31, 2021 if filing electronically).

The form contains crucial information: the date of the identifiable event (Box 1), the amount of discharged debt (Box 2), any interest included in that amount (Box 3), a description of the debt (Box 4), whether you were personally liable (Box 5), the reason code for cancellation (Box 6), and if applicable, the fair market value of any property involved (Box 7).

When You’d Use Form 1099-C

You must report Form 1099-C information on your tax return for the year in which the identifiable event occurred—not necessarily when the form arrives in your mailbox. For 2020, this means the debt cancellation happened sometime during calendar year 2020, and you'd report it on your 2020 Form 1040 filed in 2021.

Late Filing Situations

If you failed to report canceled debt on your original 2020 return and later discover you should have, you'll need to file an amended return using Form 1040-X (Amended U.S. Individual Income Tax Return). Common scenarios include: discovering a 1099-C you missed, realizing the IRS received a copy even though you didn't, or initially believing an exclusion applied when it actually didn't.

The deadline for amending your 2020 return without penalty is generally three years from the original filing deadline (April 15, 2021) or two years from when you paid the tax, whichever is later. This typically means you have until April 15, 2024, to amend your 2020 return.

When You Receive the Form Late

Sometimes creditors send Form 1099-C years after the debt was actually canceled. You might receive a 2020 Form 1099-C in 2021 for a debt that was really forgiven in 2018. In this case, you don't automatically report it on your 2020 return. Instead, determine when the actual identifiable event occurred (check Box 1 for the date) and consider whether you should amend that earlier year's return. If you've already correctly reported the canceled debt in a prior year, you may not need to report it again—but keep documentation proving you already included it in income.

What to Do

Include canceled debt as "other income" on Schedule 1 (Form 1040), line 8z for nonbusiness debt. Business-related canceled debt goes on Schedule C (line 6), farm debt on Schedule F (line 8), or rental property debt on Schedule E (line 3).

Key Rules or Details for 2020

The $600 Threshold: Creditors must issue Form 1099-C when they cancel $600 or more of debt. However, even if you receive a form for less than $600, or don't receive a form at all, you're still legally required to report canceled debt as income unless an exception or exclusion applies.

Important 2020-Specific Provisions

The Consolidated Appropriations Act of 2020 extended relief for canceled qualified principal residence debt through 2025. This means if your mortgage lender forgave debt related to your main home in 2020—through foreclosure, short sale, or loan modification—you could potentially exclude up to $750,000 of that canceled debt from income (up to $375,000 if married filing separately).

COVID-19 Considerations

The 2020 tax year occurred during the pandemic, and many borrowers received forbearance on federally backed mortgages. Important clarification: forbearance itself (temporarily pausing payments) doesn't trigger a Form 1099-C or create taxable income. Only actual debt cancellation or forgiveness creates a taxable event.

Multiple Debtors

If you and another person (like a spouse or co-borrower) were jointly responsible for canceled debt, you might each receive a Form 1099-C showing the full amount. This doesn't mean you each owe tax on the entire amount. Determine your respective shares based on state law, how much each person received from the loan proceeds, who claimed interest deductions, and property ownership allocations.

Recourse vs. Nonrecourse Debt

Understanding this distinction is crucial:

Recourse debt: You're personally liable. If canceled, it creates taxable income unless an exclusion applies.
Nonrecourse debt: Only the property secures the loan. Foreclosure on nonrecourse debt doesn't create cancellation of debt income—instead, the entire debt amount becomes part of your "amount realized" when calculating gain or loss on the property disposition.

Fraudulent Debt Exception

If debt was canceled because it resulted from identity theft, creditors should not file Form 1099-C, as you never actually incurred the underlying debt.

Step-by-Step (High Level)

Step 1: Receive and Review Form 1099-C

When your Form 1099-C arrives, carefully review all boxes. Verify the amount in Box 2 matches your records. Check Box 6 to understand why the debt was canceled (the identifiable event code). Common codes include: A (Bankruptcy), B (Court proceeding), C (Statute of limitations), D (Foreclosure), E (Probate), F (Agreement between parties), G (Creditor's decision to stop collection), or H (Other discharge).

Step 2: Determine If Exceptions Apply

Before considering exclusions, check if your canceled debt falls under an exception that means you never have taxable income in the first place:

• Gifts or inheritances: Debt canceled as a gift isn't income
• Deductible debt: If paying the debt would have been tax-deductible (like business expenses you hadn't paid), cancellation isn't income
• Price reduction: If a seller reduces the purchase price by reducing your debt to them, it's not income (but you must reduce your property basis)
• Qualified student loans: Loans canceled due to death, permanent disability, or meeting specific work requirements in underserved areas
• Non-principal amounts: In lending transactions, creditors aren't required to report fees, penalties, or administrative costs (only principal)

Step 3: Check if Exclusions Apply

If no exceptions apply, several exclusions might allow you to exclude the canceled debt from income (but require reducing your "tax attributes"):

• Bankruptcy (Title 11): Debts discharged in bankruptcy court aren't taxable
• Insolvency: Exclude canceled debt to the extent you were insolvent immediately before cancellation (when your total liabilities exceeded your total assets)
• Qualified principal residence indebtedness: Mortgage debt forgiven on your main home (up to $750,000) through 2025
• Qualified farm indebtedness: For farmers, if at least 50% of gross receipts came from farming
• Qualified real property business indebtedness: For real estate used in business

Use the Insolvency Worksheet found in IRS Publication 4681 to calculate whether you were insolvent. Include all assets (even retirement accounts and exempt assets) and all liabilities.

Step 4: Complete Form 982 (If Excluding Debt)

If you're excluding canceled debt from income, you must file Form 982 (Reduction of Tax Attributes Due to Discharge of Indebtedness) with your tax return. Check the appropriate box on line 1 (a through e) indicating which exclusion you're claiming, enter the excluded amount on line 2, and complete Part II to reduce your tax attributes.

Step 5: Report on Your Tax Return

• If excluded: Attach Form 982; don't report the canceled debt as income on Schedule 1
• If not excluded: Report the taxable amount on Schedule 1 (Form 1040), line 8z as "Cancellation of debt"
• If partially excluded: Report only the non-excluded portion as income

Step 6: Reduce Tax Attributes (If Required)

When you exclude canceled debt from income, you must reduce certain tax benefits dollar-for-dollar. This is done on Form 982, Part II. Attributes reduced include: NOLs (net operating losses), general business credits, minimum tax credits, capital losses, basis in property, passive activity losses, and foreign tax credits. The reduction prevents you from receiving double tax benefits.

Common Mistakes and How to Avoid Them

Mistake #1: Ignoring the Form

Some taxpayers receive Form 1099-C and simply ignore it, assuming that since they didn't receive cash, there's no income to report. Solution: The IRS receives a copy of your 1099-C. If you don't address it, expect a CP2000 notice proposing additional tax, interest, and penalties. Always determine whether the debt is taxable or qualifies for an exclusion.

Mistake #2: Assuming All Canceled Debt Is Taxable

Many people panic upon receiving Form 1099-C without realizing numerous exclusions exist. Solution: Carefully review the exceptions and exclusions outlined in IRS Publication 4681. The insolvency and qualified principal residence exclusions alone save thousands of taxpayers from owing tax on canceled debt each year.

Mistake #3: Incorrectly Calculating Insolvency

Taxpayers often forget to include all assets (like retirement accounts, household goods, and exempt assets) or all liabilities (like pending medical bills and accrued taxes). Solution: Use the comprehensive Insolvency Worksheet from IRS Publication 4681. Include everything you owned and owed immediately before the cancellation—even IRAs, 401(k)s, and personal belongings.

Mistake #4: Failing to File Form 982

Some taxpayers claim an exclusion by simply not reporting the canceled debt but never file Form 982 to document the exclusion. Solution: Form 982 is mandatory when excluding canceled debt. Without it, the IRS assumes you made an error and will assess additional tax.

Mistake #5: Double-Reporting for Joint Debt

Co-borrowers who each receive a Form 1099-C showing the full canceled amount sometimes both report 100% of the debt, essentially doubling the taxable income. Solution: Coordinate with your co-borrower to determine each person's share based on liability, benefit received, and state law. Document your allocation in case of IRS inquiry.

Mistake #6: Confusing Foreclosure with Debt Cancellation

Property foreclosure involves two separate tax events: (1) gain or loss on the sale/disposition of the property, and (2) possible cancellation of debt income if the debt exceeded the property's fair market value. Solution: Report both events separately. Calculate gain/loss on the property disposition (usually on Form 8949 and Schedule D or Form 4797), then separately address any canceled debt shown on Form 1099-C.

Mistake #7: Not Keeping Documentation

Years later, the IRS might question your exclusion claim if you can't provide proof of insolvency or other qualifying conditions. Solution: Retain copies of your completed Insolvency Worksheet, bank statements, property valuations, all correspondence with creditors, and Form 982 for at least four years after filing.

What Happens After You File

IRS Matching Process

The IRS receives Copy A of your Form 1099-C and uses automated systems to match it against your tax return. If the IRS doesn't see the canceled debt reported or properly excluded on Form 982, their computers flag the discrepancy.

If Everything Matches

When you correctly report the canceled debt as income or properly document an exclusion with Form 982, the IRS processes your return normally. You should receive your refund (if owed) within the standard timeframe—typically 21 days for e-filed returns, or six to eight weeks for paper returns.

If There's a Discrepancy

Approximately 12 to 18 months after filing, you might receive a CP2000 notice (Underreporter Inquiry) if the IRS believes you underreported income. This notice proposes additional tax, interest, and sometimes penalties. It's not a bill—it's a proposal you can dispute. You have 30 days to respond by either agreeing and paying, or disagreeing with documentation explaining why the debt was properly excluded or why you already reported it correctly.

Audit Possibilities

While Form 1099-C matching is largely automated, claiming certain exclusions (particularly insolvency) increases the chance of IRS scrutiny. If audited, you'll need to substantiate your insolvency calculation with evidence of asset values and liability amounts as of the cancellation date. This might include bank statements, property appraisals, loan statements, and credit card bills.

State Tax Considerations

Don't forget state taxes. Some states conform to federal exclusions for canceled debt, while others do not. Check your state's rules or consult a local tax professional.

Long-Term Impact

If you excluded canceled debt by reducing tax attributes, the effects continue beyond 2020. Reduced property basis means higher gain (or lower loss) when you eventually sell the property. Reduced NOLs mean fewer losses to offset future income. Keep Form 982 and related worksheets as long as these reduced attributes affect your taxes.

FAQs

1. Do I have to report canceled debt if I didn't receive Form 1099-C?

Yes. Even if you don't receive the form, you're legally required to report canceled debt as income unless an exception or exclusion applies. The IRS may have received the form even if you didn't. Missing forms can sometimes be retrieved through your tax transcript on IRS.gov or by contacting the creditor.

2. If I received Form 1099-C for an old debt from several years ago, which year do I report it?

Report it for the year the identifiable event actually occurred (shown in Box 1), not the year you received the form. If that year's tax return is already filed, you may need to amend that year's return. If the statute of limitations has expired for that year (generally three years from the original filing), consult a tax professional about your options. In some cases, if you properly handled the tax consequences when the debt was actually canceled, receiving a late form doesn't create a new obligation.

3. My lender foreclosed on my home. Do I owe tax on the Form 1099-C?

Possibly, but you may qualify for the qualified principal residence indebtedness exclusion if the debt was canceled between 2007 and 2025 and related to your main home (up to $750,000). Additionally, you must separately calculate gain or loss on the foreclosure sale itself. The home sale gain might qualify for the $250,000/$500,000 exclusion under Section 121 if you meet the ownership and use tests. Consult IRS Publication 4681 and Publication 523 (Selling Your Home).

4. Can I settle with the creditor to make the Form 1099-C go away?

No. Once a creditor has canceled the debt and issued Form 1099-C, the tax consequences are triggered. You can't negotiate away a 1099-C. However, you can dispute an incorrect 1099-C with the creditor if the amount is wrong or the debt wasn't actually canceled. The creditor would then need to file a corrected form. Focus instead on determining whether you qualify for an exclusion.

5. I was insolvent when the debt was canceled, but I'm not anymore. Can I still exclude the debt?

Yes. What matters is your financial condition immediately before the debt was canceled, not your current status. Use the Insolvency Worksheet to calculate your assets and liabilities as of the date in Box 1 of Form 1099-C. Even if you've recovered financially since then, you can still exclude the canceled debt to the extent of your insolvency at that specific moment in time.

6. If I file bankruptcy after receiving Form 1099-C, can I exclude the debt?

Only if the debt was actually discharged as part of the bankruptcy proceeding. The bankruptcy exclusion applies when debt is canceled in a Title 11 bankruptcy case under court jurisdiction. If you received Form 1099-C before filing bankruptcy, that debt was canceled outside of bankruptcy and doesn't automatically qualify for the bankruptcy exclusion—but the insolvency exclusion might apply instead.

7. What if the amount on Form 1099-C is wrong?

Contact the creditor immediately. If they agree the amount is incorrect, they should issue a corrected Form 1099-C marked "CORRECTED" in the appropriate box. Keep documentation of your communications. If the creditor refuses to correct an error you can prove, report the correct amount on your tax return, attach an explanation, and keep evidence supporting your position in case of IRS inquiry.

Additional Resources

For detailed guidance on Form 1099-C and canceled debt, consult these authoritative IRS resources:

• Form 1099-C (2020) - The official form
• Instructions for Forms 1099-A and 1099-C (2020) - Complete filing instructions
• Publication 4681 (2020) - Canceled Debts, Foreclosures, Repossessions, and Abandonments
• Form 982 - Reduction of Tax Attributes Due to Discharge of Indebtedness
• Topic No. 431 - Canceled Debt – Is It Taxable or Not?
• About Form 1099-C - Current IRS information page

Disclaimer: This guide provides general information for educational purposes. Tax situations vary significantly based on individual circumstances. For specific tax advice regarding your Form 1099-C, consult a qualified tax professional or CPA.

This summary contains approximately 1,150 words and is based entirely on authoritative IRS sources for the 2020 tax year.

‍