Form 1099-C: Cancellation of Debt – A 2023 Guide for Taxpayers
What the Form Is For
When a bank, credit card company, or other lender forgives part or all of a debt you owe, you might think you've caught a lucky break. But here's the surprise: the IRS typically considers canceled debt as income you must report on your tax return. Form 1099-C is the document creditors send to notify both you and the IRS when they've canceled $600 or more of your debt. Understanding this form is crucial because failing to report canceled debt properly can lead to penalties and interest charges. This guide breaks down what Form 1099-C means for you, when and how to use it, and the exceptions that might save you from paying taxes on forgiven debt.
Form 1099-C, Cancellation of Debt, is an informational tax form that lenders and creditors must file with the IRS—and send to you—when they cancel, forgive, or discharge $600 or more of debt you owe. The creditor is required to report this information because the IRS treats most canceled debt as taxable income. Think of it this way: when you borrowed money, you didn't pay taxes on those funds because you had an obligation to repay them. But if that obligation disappears, the IRS considers you to have received income equal to the amount you no longer have to pay back.
Applicable entities required to file Form 1099-C include financial institutions like banks and credit unions, federal agencies, credit card companies, and any organization whose significant business involves lending money. The form shows the amount of debt canceled, the date of cancellation, a description of the debt, and an "identifiable event code" explaining why the debt was canceled (such as bankruptcy, foreclosure, or settlement agreement). IRS.gov
You'll receive Form 1099-C when an "identifiable event" occurs. These events include: bankruptcy discharge, foreclosure or repossession that extinguishes the debt, expiration of the statute of limitations (with a court decision), a workout agreement where you settle for less than you owe, or when the creditor simply decides to stop collection efforts and write off your debt. Creditors must send you Copy B of the form by January 31 of the year following the cancellation, and they file Copy A with the IRS.
It's important to note that you don't file Form 1099-C with your tax return—the creditor does that. Instead, you use the information from Form 1099-C to report the canceled debt income on your Form 1040 (typically on Schedule 1, line 8c for non-business debts). However, several important exceptions and exclusions may allow you to avoid paying taxes on the canceled amount, which we'll discuss later in this guide. IRS Instructions
When You'd Use It (Late/Amended Filings)
Late Receipt of Form 1099-C
If you receive a Form 1099-C after you've already filed your tax return for that year, you must generally file an amended return using Form 1040-X (Amended U.S. Individual Income Tax Return) to report the canceled debt income—unless an exception or exclusion applies. You typically have three years from the date you filed your original return, or two years from the date you paid the tax (whichever is later), to file an amended return. Late-arriving Forms 1099-C are surprisingly common because creditors have until January 31 of the following year to send the form, but many taxpayers file their returns before receiving all their tax documents.
Disputing an Incorrect Form 1099-C
Sometimes creditors issue Forms 1099-C containing errors—wrong amounts, incorrect dates, or for debts that weren't actually canceled. If you believe the form is incorrect, contact the creditor immediately to request a corrected Form 1099-C. Document all your communications. If the creditor agrees the form was issued in error, they should file a corrected form with the IRS and send you a copy. If they refuse or don't respond, you should still report the situation accurately on your tax return, attach a statement explaining the discrepancy, and keep records of your attempts to resolve the issue.
When the Statute of Limitations Matters
In some cases, creditors issue Forms 1099-C years after the debt became delinquent, sometimes even after the statute of limitations for collecting the debt has expired. However, an identifiable event based on statute of limitations expiration only occurs when a court upholds your affirmative defense and the appeal period has expired. If you receive a Form 1099-C that doesn't reflect a valid identifiable event, you may need to challenge it with documentation.
Amended Returns for Missed Exceptions
If you previously reported canceled debt as income but later realize you qualified for an exception or exclusion (such as insolvency or qualified principal residence indebtedness), you can file an amended return to claim a refund. You'll need to attach Form 982 (Reduction of Tax Attributes Due to Discharge of Indebtedness) to document your qualification for the exclusion. This is one situation where understanding the rules can potentially save you thousands of dollars. IRS Publication 4681
Key Rules for 2023
$600 Threshold
Creditors must issue Form 1099-C only when they cancel $600 or more of debt. However, even if you don't receive a Form 1099-C (because the amount was less than $600, or the creditor failed to issue one), you're still required to report any canceled debt as income unless an exception or exclusion applies.
Multiple Debtors
For debts of $10,000 or more incurred after December 31, 1994, where multiple people are jointly and severally liable (like a jointly held credit card), each person may receive a Form 1099-C showing the entire canceled amount. This doesn't mean everyone must report the full amount as income; the actual tax treatment depends on factors like who received the borrowed funds, who claimed interest deductions, and state law. For debts under $10,000 or incurred before 1995, creditors typically issue the form only to the primary borrower.
Recourse vs. Nonrecourse Debt
This distinction is crucial. Recourse debt means you're personally liable—if the property securing the loan is worth less than the debt, the lender can pursue you for the difference. Nonrecourse debt means the lender's only remedy is seizing the collateral property. With recourse debt, if a foreclosure sale doesn't cover the full loan balance, the forgiven difference typically creates taxable income. With nonrecourse debt, you generally don't have cancellation of debt income, but the entire unpaid balance becomes part of your "amount realized" when calculating gain or loss on the property disposition.
2023 Qualified Principal Residence Indebtedness
For 2023, one of the most valuable exclusions remains available: if debt on your main home was canceled in connection with a foreclosure, short sale, or loan modification, you can exclude up to $750,000 ($375,000 if married filing separately) from income. This exclusion applies to debt canceled before January 1, 2026, or pursuant to a written agreement entered into before that date. The debt must have been used to buy, build, or substantially improve your principal residence and must be secured by that residence. IRS.gov
Student Loan Discharges (2021–2025)
A special rule applies to student loans discharged between December 31, 2020, and January 1, 2026. During this period, most forgiven student loan debt is excluded from taxable income, regardless of the reason for discharge. This includes federal student loans, private education loans, and loans from educational institutions. You won't receive a Form 1099-C for these qualifying discharges, and you don't need to report them as income. This provision provides significant relief for borrowers. IRS Publication 4681
Interest Included in Canceled Debt
Form 1099-C shows the total canceled debt in Box 2, with any interest portion separately identified in Box 3. Whether the interest portion is taxable depends on whether it would have been deductible if you'd paid it. For example, canceled credit card interest is generally taxable, while canceled mortgage interest on a rental property might be deductible as a business expense.
Step-by-Step (High-Level)
Step 1: Verify the Information
Carefully review all boxes on the form. Box 2 shows the amount of canceled debt—is it accurate? Box 1 shows the date of the identifiable event—does it match your records? Box 6 shows the reason code for cancellation. If anything seems incorrect, contact the creditor immediately for a corrected form before filing your return.
Step 2: Determine If Exceptions Apply
Before treating the canceled debt as taxable income, check if any exceptions apply that would mean you don't have income at all. These include: gifts or inheritances, certain qualified student loans (with work requirements), amounts that would have been tax-deductible if you'd paid them (like business expenses), or purchase price reductions from the seller (like a rebate). If an exception applies, you generally don't report the amount as income and don't need to file Form 982.
Step 3: Evaluate Exclusions
If no exception applies, determine whether you qualify for one of the exclusions that allow you to exclude the canceled debt from income. The most common exclusions are: bankruptcy (the debt was discharged in Title 11 bankruptcy), insolvency (your total debts exceeded your total assets immediately before the cancellation), qualified principal residence indebtedness (debt on your main home, with limits), qualified farm indebtedness, or qualified real property business indebtedness. Each exclusion has specific requirements and documentation needs.
Step 4: Complete Form 982 (If Applicable)
If you qualify for any exclusion, you must file Form 982 with your tax return. This form requires you to identify which exclusion(s) apply and calculate the amount you're excluding from income. Most exclusions require you to reduce certain "tax attributes" (like net operating losses, credits, or the basis of property you own) by the amount excluded. Form 982 walks you through these calculations. This is the most complex part of handling Form 1099-C, and many taxpayers benefit from professional assistance here.
Step 5: Report on Your Tax Return
If the debt is fully excludable, you file Form 982 and don't report the amount as income. If the debt is partially excludable, report only the non-excludable portion as income. If no exceptions or exclusions apply, report the amount from Box 2 of Form 1099-C as "other income" on Schedule 1 (Form 1040), line 8c, which then carries to your main Form 1040. For business-related canceled debt, report it on the appropriate schedule (Schedule C for sole proprietors, Schedule F for farmers, etc.).
Step 6: Keep Records
Retain copies of Form 1099-C, Form 982 (if filed), and all supporting documentation (workout agreements, property valuations, insolvency calculations) for at least four years after filing your return. If the IRS questions your treatment of canceled debt, these records will be essential. IRS Instructions
Common Mistakes and How to Avoid Them
Mistake #1: Ignoring Form 1099-C Because You Think "Forgiven Debt Isn't Income."
Many taxpayers mistakenly believe that if a creditor forgives a debt, they don't need to report anything because they never received actual cash. The IRS disagrees—when your obligation to repay is extinguished, you've received an economic benefit equivalent to income.
How to Avoid: Always report Form 1099-C on your return, even if you ultimately exclude the amount from income using Form 982. Ignoring the form can trigger IRS matching notices and penalties.
Mistake #2: Failing to File Form 982 When Qualifying for an Exclusion
Some taxpayers correctly determine they qualify for insolvency or another exclusion but forget to file Form 982 to document it. Without Form 982, the IRS will assume the full amount is taxable income.
How to Avoid: Whenever you receive Form 1099-C and qualify for an exclusion, Form 982 is mandatory—not optional. File it with your original return, not as an afterthought.
Mistake #3: Incorrectly Calculating Insolvency
The insolvency exclusion is one of the most commonly used but also commonly miscalculated. To qualify, your total liabilities must exceed your total assets immediately before the debt cancellation. Many taxpayers forget to include all assets (retirement accounts, vehicle value, home equity) or incorrectly value assets.
How to Avoid: Use the Insolvency Worksheet in IRS Publication 4681 to systematically list and value all assets and liabilities. Be conservative with asset values—use fair market value, not what you wish the assets were worth. Consider hiring a professional if your financial situation is complex.
Mistake #4: Not Distinguishing Between Foreclosure Gain and Canceled Debt Income
When property is foreclosed or repossessed, two separate tax events may occur: (1) gain or loss on the disposition of the property itself, and (2) ordinary income from canceled debt if the debt exceeded the property's fair market value. Many taxpayers confuse these or report only one when both apply.
How to Avoid: When you receive Form 1099-A (Acquisition or Abandonment of Secured Property) and/or Form 1099-C together, work through the calculations for both potential tax consequences. The foreclosure may create a capital gain or loss (reported on Schedule D), while any debt forgiveness beyond the property value creates ordinary income (reported on Schedule 1).
Mistake #5: Misunderstanding the Principal Residence Exclusion Limits
The exclusion for qualified principal residence indebtedness has a $750,000 limit ($375,000 if married filing separately). If your canceled mortgage debt exceeds this amount, the excess is still taxable (subject to other exclusions like insolvency). Additionally, the exclusion only applies to acquisition debt—money borrowed to buy, build, or substantially improve the home—not cash-out refinancing used for other purposes.
How to Avoid: Carefully review the rules in Publication 4681. If you refinanced your mortgage, calculate how much of the refinanced amount was original acquisition debt versus cash-out amounts used for other purposes (college tuition, credit card payoff, etc.). Only the acquisition portion qualifies for the principal residence exclusion.
Mistake #6: Receiving a Form 1099-C for Very Old Debt and Assuming It's Accurate
Some collection agencies or subsequent debt purchasers issue Forms 1099-C for debts that are many years old, sometimes exceeding the statute of limitations for collection. An identifiable event based on statute of limitations expiration requires a court decision upholding your defense—a form issued simply because time passed may not reflect an actual identifiable event.
How to Avoid: If you receive a Form 1099-C for old debt and you haven't had contact with the creditor in years, and no court proceeding occurred, the form may be questionable. Document why you believe the form is incorrect and consider seeking professional advice before reporting the income. IRS Publication 4681
What Happens After You File
IRS Matching Process
The IRS receives Copy A of your Form 1099-C directly from the creditor. Their computers automatically match this against what you reported on your return. If the amounts don't match, or if you failed to report the Form 1099-C at all, you'll likely receive a CP2000 notice (Underreporter Inquiry) proposing additional tax, penalties, and interest. This typically arrives 12 to 18 months after you file your return.
Responding to IRS Notices
If you receive a CP2000 notice about Form 1099-C, don't panic—these notices are proposals, not final determinations. You have the right to respond, explain why you excluded the income (providing Form 982 if you forgot to include it originally), or dispute the accuracy of the Form 1099-C. Most CP2000 notices can be resolved through correspondence without requiring an in-person meeting. Respond by the deadline shown on the notice (typically 30 days) with a clear explanation and documentation supporting your position.
Audit Considerations
Claiming exclusions for canceled debt, particularly the insolvency exclusion, does increase your chances of audit review because it requires subjective asset and liability valuations. If audited, you'll need to substantiate your insolvency calculation with documentation: bank statements, property appraisals, loan documents, credit card balances, and other records showing your financial position on the date of debt cancellation. Keep these records for at least three years after filing (six years if the excluded amount is substantial).
State Tax Implications
While this guide focuses on federal taxes, remember that state tax treatment of canceled debt varies significantly. Some states automatically conform to federal tax law, meaning if you exclude canceled debt on your federal return, it's also excluded on your state return. Other states have different rules—some states tax canceled debt even when it's federally excluded. Check your state's specific rules or consult a tax professional familiar with your state's tax code.
Impact on Future Tax Attributes
If you exclude canceled debt from income using the bankruptcy or insolvency exclusion, you must reduce certain "tax attributes" in a specific order. This typically means reducing net operating losses first, then general business credits, then capital loss carryovers, and finally the basis of property you own. These reductions can affect your taxes in future years—for example, reduced property basis means more taxable gain when you eventually sell the property. Form 982 handles these calculations, but understanding the long-term implications is important.
Refund Opportunities
If you previously reported canceled debt as income without realizing you qualified for an exclusion, and it's been less than three years since you filed that return, you can file an amended return (Form 1040-X) with Form 982 to claim a refund. This is particularly common for taxpayers who qualified for insolvency but didn't know it, or who received debt forgiveness during the student loan discharge period (2021–2025) but erroneously reported it as income. IRS Topic 431
FAQs
Q1: I received Form 1099-C for a credit card debt that was charged off five years ago. Why am I getting this now, and do I have to pay taxes on it?
A: Creditors often wait years before filing Form 1099-C, sometimes using charge-off as the identifiable event, or waiting until they sell the debt or decide to stop collection efforts (Code G). The date in Box 1 determines which tax year to report the canceled debt. If the identifiable event occurred in 2023, it's reported on your 2023 return, even if you stopped making payments years earlier. You must report it as income unless an exception or exclusion applies. If you were insolvent at the time of the identifiable event, you may be able to exclude some or all of the amount using Form 982.
Q2: My house was foreclosed in 2023. I received both Form 1099-A and Form 1099-C. How do I report both?
A: Form 1099-A reports the acquisition of secured property (the foreclosure), while Form 1099-C reports canceled debt. You may have two separate tax consequences: (1) gain or loss on the foreclosure (compare the property's fair market value to your adjusted basis in the home—report on Schedule D if applicable), and (2) ordinary income from canceled debt if the loan balance exceeded the fair market value. If the home was your principal residence, you may qualify to exclude both the foreclosure gain (up to $250,000/$500,000 under the home sale exclusion) and the canceled debt (under the qualified principal residence indebtedness exclusion). Publication 4681 contains detailed worksheets for these calculations.
Q3: I was insolvent when my debt was canceled, but I don't have documentation proving the exact value of everything I owned. What should I do?
A: Do your best to reconstruct your financial position on the date of cancellation. For assets: check old bank statements, request property valuations or tax assessments from county records, use Kelly Blue Book for vehicle values, and obtain statements from retirement accounts. For liabilities: request debt validation letters from creditors, check credit reports (historical data may be available), and review old bills and statements. If you cannot precisely document every asset and liability, use reasonable estimates based on the best information available, and document your methodology. The IRS understands that perfect records may not exist, but you should make a good-faith effort to be accurate.
Q4: The amount on my Form 1099-C is wrong—it's much higher than what I actually owed. What should I do?
A: First, contact the creditor immediately to dispute the amount and request a corrected Form 1099-C. Document your calls and correspondence. If you have loan statements, settlement agreements, or other records showing the correct amount, provide copies to the creditor. If they issue a corrected form, wait to file your return until you receive it. If they refuse to correct it or don't respond, you should file your return reporting only the correct amount of canceled debt, attach a statement explaining the discrepancy, and include copies of your supporting documentation. Keep detailed records in case the IRS questions the difference.
Q5: I settled a business credit card debt. How is this reported differently from personal debt cancellation?
A: Business debt cancellation is reported differently than personal debt cancellation. Instead of reporting it on Schedule 1, line 8c, you report it on the appropriate business schedule: Schedule C (sole proprietorship) line 6, Schedule E (rental property) line 3, or Schedule F (farm income) line 8. The same exceptions and exclusions apply, but the insolvency calculation for business debt is more complex and may include different types of assets and liabilities. Additionally, if the canceled business debt relates to depreciable property, special rules may apply. Consider consulting a tax professional for business-related canceled debt.
Q6: Do I need to report Form 1099-C if the amount was under $600?
A: Creditors are only required to issue Form 1099-C if they cancel $600 or more. However, even if you don't receive a form because the amount was less than $600, you're technically still required to report canceled debt as income (unless an exception or exclusion applies). As a practical matter, the IRS has no matching document for amounts under $600, so reporting compliance for small amounts is lower. But to be technically correct, all canceled debt should be reported as income unless specifically excluded or excepted.
Q7: I received Form 1099-C for student loan debt that was forgiven due to my death or disability. Do I need to report this?
A: For discharges between December 31, 2020, and January 1, 2026, student loan forgiveness is generally excluded from income regardless of the reason (death, disability, income-driven repayment forgiveness, etc.). You should not receive a Form 1099-C for qualifying student loan discharges during this period. If you do receive one, it may have been issued in error, or the discharge may not qualify. For discharges outside this timeframe, different rules apply: discharge due to death or permanent and total disability may be excluded if specific requirements are met. Consult Publication 4681 for detailed guidance on your specific situation.
Additional Resources
- IRS Form 1099-C – Official form page with current revision and instructions
- IRS Topic 431: Canceled Debt – Overview of canceled debt tax treatment
- IRS Publication 4681 – Comprehensive guide to canceled debts, foreclosures, and repossessions
- Instructions for Forms 1099-A and 1099-C – Detailed instructions for both forms
- Form 982: Reduction of Tax Attributes – Required form for claiming exclusions
Disclaimer: This guide provides general information based on 2023 tax law. Tax situations vary, and laws change. Consult a qualified tax professional for advice specific to your circumstances.
