Form 1099-C: Cancellation of Debt (2015) – A Complete Guide
When a lender forgives or cancels a debt you owe, it might sound like good news—but the IRS generally treats that cancelled amount as taxable income. Form 1099-C is the document that reports this cancelled debt, and understanding it can help you avoid confusion and costly mistakes when tax season arrives. IRS
What the Form Is For
Form 1099-C, Cancellation of Debt, is an information return that creditors send to both you and the IRS when they cancel, forgive, or discharge $600 or more of your debt. Think of it as a receipt showing that your lender has written off money you owed them—and now the IRS wants to know about it because that forgiven amount is usually considered taxable income.
The form is issued by financial institutions (banks, credit unions), credit card companies, federal agencies, and other organizations whose primary business involves lending money. You'll receive this form when specific "identifiable events" occur, such as a debt discharge in bankruptcy, a foreclosure where remaining debt is cancelled, or when a creditor simply decides to stop collection efforts and write off your debt. IRS
The document includes critical information: the date of the cancellation event, the amount of cancelled debt, the type of debt (mortgage, credit card, student loan), and whether you were personally liable for repayment. Understanding each box on this form is essential because you'll need this information to properly report the cancelled debt on your tax return—or to claim an exclusion if you qualify for one.
When You’d Use Form 1099-C
You receive Form 1099-C from your creditor, not from the IRS—you don't "file" it yourself. However, you must report the information on your tax return for the year shown in Box 1 (Date of Identifiable Event). If you file your tax return before receiving a 1099-C, you may need to file an amended return using Form 1040X to report the cancelled debt income.
Late or Amended Returns
Late-arriving 1099-C forms are surprisingly common. Sometimes creditors issue the form years after you thought the debt was resolved, particularly when the "36-month non-payment testing period" expires. If you receive a 1099-C after filing your return, you generally have three options: file an amended return to report the income, file an amended return with Form 982 to claim an exclusion if you qualify, or dispute the form with the creditor if it's incorrect or premature.
The IRS typically has three years from your filing date to audit your return, but if you omit income that's more than 25% of your gross income, they have six years. If you don't report a 1099-C at all, the IRS will likely send you a notice proposing additional tax, interest, and penalties, so addressing it promptly—even late—is crucial.
Key Rules or Details for 2015
For tax year 2015, several important rules governed Form 1099-C reporting. The $600 threshold meant that creditors only had to issue the form when cancelled debt reached or exceeded that amount. If your creditor cancelled $500, no form would be issued, though technically you might still owe tax on that income.
The "identifiable event" requirement was central to 2015 reporting. Creditors had to file Form 1099-C when one of nine specific events occurred, including: bankruptcy discharge, court-ordered cancellation, statute of limitations expiration, a formal agreement to cancel debt, discontinued collection activity, or the expiration of a 36-month non-payment period. This last event was particularly significant in 2015—if a financial institution received no payment for 36 consecutive months and didn't engage in significant collection activity, they were required to issue a 1099-C. IRS
Another critical 2015 rule involved the Mortgage Forgiveness Debt Relief Act, which was extended through the end of 2016. This provision allowed taxpayers to exclude up to $2 million of forgiven mortgage debt on their principal residence from taxable income if the debt was forgiven during 2007-2016. This was especially important for homeowners who went through foreclosure or short sales during this period.
The insolvency exclusion also applied in 2015. If your total debts exceeded your total assets immediately before the debt cancellation, you could exclude some or all of the cancelled debt from income—but you had to file Form 982 to claim this exclusion and carefully calculate your insolvency amount. IRS
Step-by-Step (High Level)
Step 1: Receive and Review the Form.
When your 1099-C arrives (usually by January 31 following the tax year), carefully examine all boxes. Verify the cancelled amount in Box 2, check the date in Box 1, and confirm the debt description in Box 4 matches your records.
Step 2: Determine if You Must Include It as Income.
Not all cancelled debt is taxable. Review the exceptions: debt cancelled in bankruptcy (Title 11), insolvency, qualified principal residence indebtedness, certain student loans, and others. If you qualify for an exception, you'll need to file Form 982 with your return. IRS Publication 4681
Step 3: Calculate Your Insolvency (if applicable).
If you believe you were insolvent when the debt was cancelled, list all your assets (house, car, bank accounts, retirement accounts) and all your debts (mortgages, credit cards, student loans, medical bills). If debts exceeded assets, you were insolvent. You can exclude cancelled debt up to the amount you were insolvent.
Step 4: Complete the Appropriate Tax Forms.
If the debt is taxable, report it on Schedule 1 (Form 1040), line 8 as "other income." If you're claiming an exclusion, complete Form 982 and attach it to your return. Form 982 requires you to indicate which exclusion applies and reduce certain tax attributes accordingly.
Step 5: Dispute Incorrect Forms (if necessary).
If the 1099-C contains errors—wrong amount, incorrect date, or reports debt you still owe—contact the creditor immediately in writing. Request a corrected form. If the creditor refuses and you believe you're right, file your return correctly and attach an explanation.
Step 6: Keep Documentation.
Maintain copies of the 1099-C, Form 982, insolvency worksheets, and all correspondence with creditors for at least four years in case of an IRS audit.
Common Mistakes and How to Avoid Them
Ignoring the Form Entirely.
The most costly mistake is simply not reporting a 1099-C. The IRS receives a copy too, and their computers will flag the discrepancy. Even if you believe the debt isn't taxable, you must address it on your return—either by reporting it as income or claiming an exclusion with Form 982.
Confusing Cancellation with Ongoing Debt.
Receiving a 1099-C doesn't always mean you no longer owe the debt. In some states, creditors can report a debt as cancelled for tax purposes while still retaining the legal right to collect. However, if you're being sued or receiving collection calls about debt reported on a 1099-C, consult an attorney—the creditor may have acted improperly.
Failing to Claim Legitimate Exclusions.
Many taxpayers unnecessarily pay tax on cancelled debt because they don't realize they qualify for the insolvency or bankruptcy exclusions. If you were financially distressed when debt was cancelled, investigate whether you were insolvent. The calculation takes effort, but it could save thousands in taxes.
Incorrect Insolvency Calculations.
When calculating insolvency, people often miss debts or overvalue assets. Use fair market value (what assets could sell for), not purchase price. Include all debts, even those to family members. The insolvency must exist immediately before the cancellation—not months earlier or later. IRS
Misunderstanding the 36-Month Rule.
Many taxpayers receive unexpected 1099-C forms years after a debt went unpaid because of the 36-month non-payment testing period. Financial institutions are required to issue the form once this period expires, even if you assumed the debt was long forgotten. This doesn't always mean the statute of limitations for collecting the debt has expired—those are separate legal issues.
Not Reducing Tax Attributes on Form 982.
When you exclude cancelled debt from income using Form 982, you must reduce certain tax attributes like net operating losses or basis in property. Skipping this step or doing it incorrectly can trigger IRS scrutiny.
What Happens After You File
Once you properly report the 1099-C on your tax return—either as taxable income or with an exclusion—the information becomes part of your permanent tax record for that year. If you report it as income, it increases your adjusted gross income, potentially affecting your tax bracket, eligibility for credits, and other income-based calculations.
If you claim an exclusion using Form 982, that form becomes a critical part of your return. The IRS may review it more carefully, especially if the cancelled debt amount is substantial. Having thorough documentation of your insolvency calculation or qualification for other exclusions is essential if questioned.
The creditor's obligation ends once they issue the 1099-C to you and the IRS. However, whether they can still attempt to collect the debt depends on state law, the type of debt, and other factors beyond federal tax rules. A 1099-C is a tax document, not a legal document preventing collection.
If you don't report the 1099-C and the IRS catches the omission (which they usually do through automated matching), you'll receive a CP2000 notice proposing additional tax, plus interest and possibly penalties. You'll have an opportunity to respond, provide Form 982 if applicable, or explain why the form was incorrect. Responding promptly and thoroughly to these notices is crucial to avoid escalating penalties.
For cancelled mortgage debt on your principal residence in 2015, the exclusion under the Mortgage Forgiveness Debt Relief Act protected many homeowners from devastating tax bills after foreclosure or short sale. This provision was later extended several times but eventually expired, making 2015 a year when this relief was particularly valuable.
FAQs
Q: Does receiving a 1099-C mean I don't owe the debt anymore?
Not necessarily. The 1099-C is a tax reporting document, not a legal release from debt. In some cases, creditors issue the form while retaining the right to collect under state law. If you're receiving collection calls on cancelled debt, consult an attorney. However, in many cases, particularly after bankruptcy or formal settlement agreements, the debt is truly cancelled.
Q: I was insolvent when my debt was cancelled. How do I calculate that?
Create a balance sheet showing all your assets (fair market value of home, car, bank accounts, investments, retirement accounts, personal property) and all your debts (mortgages, credit cards, student loans, medical bills, personal loans). If total debts exceeded total assets immediately before cancellation, you were insolvent to that extent. You can exclude cancelled debt up to your insolvency amount using Form 982. IRS
Q: What if the amount on the 1099-C is wrong?
Contact the creditor in writing immediately. Explain the error and request a corrected Form 1099-C. Keep copies of all correspondence. If the creditor refuses to correct it and you're confident it's wrong, file your return with the correct information and attach a statement explaining the discrepancy. The burden will be on you to prove your position if the IRS questions it.
Q: Can I exclude cancelled credit card debt?
Generally, no—unless you qualify for an exclusion like insolvency or bankruptcy. The Mortgage Forgiveness Debt Relief Act only applied to qualified principal residence indebtedness, not credit cards or other consumer debt. If you were insolvent when the credit card debt was cancelled, that's your best option for exclusion.
Q: I received a 1099-C for a debt from 2012. Is this correct?
Possibly. Creditors can issue a 1099-C years after a debt went unpaid if an "identifiable event" occurred in 2015. The 36-month non-payment rule often triggers late 1099-C forms. The date in Box 1 should show 2015 if you're receiving it for tax year 2015. The debt might have originated years earlier, but the cancellation event occurred in 2015.
Q: Do I need a tax professional to handle this?
For straightforward situations where you're reporting the cancelled debt as income, you can likely handle it yourself. However, if you're claiming insolvency, bankruptcy exclusion, or the mortgage forgiveness exclusion, or if the amount is substantial, consulting a tax professional is wise. The rules are complex, and mistakes can be costly.
Q: What's the difference between a 1099-C and a 1099-A?
Form 1099-A reports acquisition or abandonment of secured property (like a foreclosure), while Form 1099-C reports cancellation of debt. Sometimes you'll receive both forms for the same transaction; sometimes creditors issue only a 1099-C that combines the information. The 1099-A reports the property's fair market value, while the 1099-C reports the cancelled debt amount. You may owe tax on both the property transaction and the cancelled debt, or you may qualify for exclusions.
For More Information
IRS Form 1099-C Instructions (2015)
IRS Publication 4681: Cancelled Debts, Foreclosures, Repossessions
IRS Topic 431: Canceled Debt
Form 982: Reduction of Tax Attributes
