What Form 1099-C (2023) Is For
IRS Form 1099-C (2023), Cancellation of Debt, is used by lenders, banks, and tribal government agencies to report canceled debts of $600 or more. The Internal Revenue Service requires creditors, nonprofit organizations, and financial institutions to file this form when they forgive or discharge money owed by a borrower.
It shows the taxable amount of canceled debt, including interest, property repossessions, and foreclosure details. Taxpayers must review the form carefully, as the IRS assumes that canceled debt is taxable income unless they qualify to exclude it under federal law.
When You’d Use Form 1099-C
Taxpayers use Form 1099-C when a creditor or lender forgives a remaining balance on a loan, credit card balance, or settlement agreement. Receiving this form means the IRS considers that canceled debt as potential income to report on a tax return.
If a form contains incorrect information or is received after filing, an amended return should be submitted using Form 1040-X. In most cases, the taxpayer must contact the creditor or loan servicer to verify payments, correct errors, and document the forgiven debt for compliance.
Key Rules and Details for 2023
For 2023, debt cancellation rules apply to recourse and nonrecourse debts, including those tied to property with fair market value differences. Canceled debts from a principal residence, foreclosure, or repossession may qualify for exclusion under the qualified principal residence indebtedness rule.
Federal student loans discharged through Federal Student Aid, Direct Loan programs, or Public Service Loan Forgiveness between 2021 and 2025 are generally exempt from taxable income. Debt forgiven through bankruptcy court or under the Servicemembers Civil Relief Act may also qualify as excluded income when appropriately reported.
For complete details on wage reporting, withholdings, and unemployment tax filings, see our guide for Information Returns & Reporting Forms.
Step-by-Step (High Level)
Step 1: Verify the Form
Review Form 1099-C for correct names, Social Security numbers, amounts, and dates. Verify that the debt and creditor match known accounts and that the identifiable event code accurately reflects the situation.
Step 2: Determine If Exceptions Apply
Verify if the forgiven amount represents gifts, inheritances, or purchase price reductions. These exceptions are not taxable and require no additional forms.
Step 3: Evaluate Exclusions
Confirm whether the canceled debt qualifies under insolvency, bankruptcy, principal residence, business, or farm-debt exclusions.
Step 4: Complete Form 982 if Needed
If any exclusion applies, the taxpayer must file Form 982 to identify the excluded debt and adjust the relevant tax attribute accordingly.
Step 5: Report on the Tax Return
Report taxable amounts as other income on Schedule 1 (Form 1040), line 8c. Business debt should be listed on the appropriate schedule, such as Schedule C or Schedule F.
Step 6: Keep Records
Maintain copies of Form 1099-C, Form 982, loan agreements, correspondence with creditors, and fair-market-value appraisals for at least four years.
Common Mistakes and How to Avoid Them
Taxpayers often make avoidable mistakes when reporting canceled or forgiven debt. Understanding how the IRS treats debt cancellation can prevent costly penalties.
- Ignoring Form 1099-C canceled debt income: Report canceled debt as taxable income unless you qualify for a legal exclusion, since the IRS generally treats most forgiven debt as income.
- Claiming an exclusion without attaching Form 982: Include Form 982 with the return whenever you exclude canceled debt to prevent the IRS from treating the amount as taxable.
- Confusing foreclosure gain with cancellation-of-debt income: Separate the sale/foreclosure calculation from canceled debt reporting, since each has different tax treatment and forms.
- Miscalculating insolvency: List all assets and liabilities at fair market value—including vehicles and retirement accounts—before determining the amount eligible for exclusion.
- Failing to dispute incorrect Form 1099-C information: Contact the lender for a corrected form before filing, because fixing errors is harder after the return is submitted.
Avoiding these errors helps prevent audits, CP2000 notices, and penalties for underreporting income related to canceled debt.
What Happens After You File
Once the return is filed, the IRS matches the Form 1099-C submitted by the creditor with the taxpayer’s return. If the form is missing or the reported amount differs, the IRS issues a CP2000 notice requesting an explanation or additional tax payment. Responding promptly with documentation—including Form 982, settlement agreements, and proof of insolvency—can resolve the matter without penalties.
When a taxpayer excludes canceled debt due to bankruptcy or insolvency, the law requires reducing specific tax attributes, such as loss carryovers or property basis. This adjustment can affect future taxable gain if the property is sold. State tax rules may differ, so filers should verify whether their state taxes forgive debts that are exempt federally.
FAQs
Why did I receive Form 1099-C for a credit card balance I stopped paying years ago?
A creditor may cancel a remaining balance after determining it cannot collect the debt. Even if time has passed, the IRS requires reporting for the tax year in which the creditor formally discharged the obligation.
Do I owe taxes on debt forgiven through a settlement agreement?
In most cases, yes, unless the debt was discharged in bankruptcy or you qualify for an exclusion, the canceled amount is taxable income.
What if I get Form 1099-C after filing my tax return?
File Form 1040-X to amend your return and report the income or apply an exclusion. Attach Form 982 if you exclude the debt.
Are student loans forgiven under Public Service Loan Forgiveness taxable?
For the 2021–2025 period, student loans forgiven under federal programs, such as PSLF or Federal Student Aid initiatives, are not taxable. The IRS excludes these amounts from income.
How does foreclosure affect taxable income?
A foreclosure may produce two separate results: a capital gain or loss based on the property’s fair market value, and ordinary income from debt cancellation if the loan exceeded that value.
When does a bankruptcy court discharge exclude canceled debt?
Debts formally discharged under Title 11 of the U.S. Code are not taxable. The taxpayer must attach Form 982 to the return to claim this exclusion.
What records should be kept for proof of cancellation or repayment?
Keep copies of the form, settlement letters, payment receipts, loan servicer statements, and any documentation showing how fair market value was determined.
