Form 1099-C Cancellation of Debt: A Complete Guide for 2013
What Form 1099-C Is For
Form 1099-C, Cancellation of Debt, is an information return issued by lenders and creditors when they cancel, forgive, or discharge $600 or more of your debt. This form serves as official documentation that you've been relieved of a debt obligation—but here's the catch: the IRS typically considers canceled debt as taxable income.
Think of it this way: if you borrowed $10,000 and only paid back $4,000, and the creditor forgives the remaining $6,000, you've essentially received $6,000 that you don't have to pay back. The IRS views this as income you must report on your tax return, similar to wages or interest earnings.
The form is issued to debtors (the person who owed the money) by various types of creditors, including banks, credit unions, credit card companies, federal agencies, and other financial institutions. You'll receive Copy B for your records, while the creditor files Copy A with the IRS. This means the IRS already knows about your canceled debt, so failing to report it can trigger audits and penalties.
Form 1099-C includes critical information such as the date of cancellation, the amount discharged, whether you were personally liable for the debt, and the type of identifiable event that triggered the cancellation (like bankruptcy, foreclosure, or the expiration of collection efforts).
IRS Form 1099-C 2013
When You’d Use Form 1099-C (Late/Amended Filing)
For Debtors
You don't actually "file" Form 1099-C—you receive it from your creditor. However, you must report the canceled debt income on your tax return. If you received a Form 1099-C after filing your 2013 tax return, you may need to file an amended return using Form 1040X to report the canceled debt income (unless an exclusion applies).
The typical timeline for receiving Form 1099-C is by January 31, 2014 for debts canceled during the 2013 tax year. If you receive the form late, you should still report the income on your return or file an amended return if you've already filed.
For Creditors
If you're a creditor who failed to file Form 1099-C by the original deadline (February 28, 2014 for paper filing, or March 31, 2014 for electronic filing), you should file it as soon as possible to avoid penalties. Late filing can result in penalties as detailed in the 2013 General Instructions for Certain Information Returns.
You might need to file a corrected Form 1099-C if you discover errors in the amount reported, the debtor's taxpayer identification number, or other critical information. Check the "CORRECTED" box at the top of the form and file it with the IRS, also providing a corrected copy to the debtor.
IRS Instructions for Forms 1099-A and 1099-C 2013
Key Rules or Details for 2013
$600 Threshold
Creditors must file Form 1099-C only when the canceled debt equals or exceeds $600. However, even if you receive no form because the canceled debt was less than $600, you must still report it as income on your tax return.
Identifiable Event Codes Required
Starting in 2013, creditors must use specific codes (A through I) in Box 6 to identify why the debt was canceled. These codes include bankruptcy (A), judicial debt relief (B), statute of limitations expiration (C), foreclosure (D), probate proceedings (E), agreement (F), policy to discontinue collection (G), 36-month nonpayment period (H), or other discharge (I).
36-Month Nonpayment Testing Period
For financial institutions and credit unions, an automatic identifiable event occurs when no payment has been received for 36 months (ending December 31), unless the creditor engaged in significant collection activity during the prior 12 months or circumstances indicate the debt wasn't actually canceled.
Multiple Debtors
For debts of $10,000 or more incurred after 1994 with joint and several liability, creditors must report the entire canceled amount on each debtor's separate Form 1099-C.
Bankruptcy Exception
Creditors don't need to report debts discharged in bankruptcy unless their records show the debt was incurred for business or investment purposes (not personal use).
No Truncation of ID Numbers
Unlike some previous years, the 2013 pilot program for truncating Social Security numbers ended, so creditors must show complete taxpayer identification numbers on all copies.
IRS Instructions for Forms 1099-A and 1099-C 2013
Step-by-Step (High Level): How to Handle Form 1099-C
For Debtors (Taxpayers)
Step 1: Review Your Form 1099-C
When you receive the form (typically by January 31, 2014), carefully review Box 2 (amount of debt discharged) and Box 6 (identifiable event code). Verify the amount is correct by comparing it to your records. If there's an error, contact your creditor immediately for a corrected form.
Step 2: Determine If You Qualify for an Exclusion
Not all canceled debt is taxable. Check if you qualify for common exclusions: bankruptcy discharge (Title 11), insolvency (your debts exceeded your assets immediately before the cancellation), qualified principal residence indebtedness (for mortgage debt on your main home, available through 2013), qualified farm indebtedness, or student loan discharge for work in underserved areas.
Step 3: Calculate Your Exclusion Amount
If you believe you're insolvent, calculate your total debts minus your total assets immediately before the debt cancellation. You can exclude up to the amount you were insolvent. For example, if your debts were $50,000 and your assets were $42,000, you were insolvent by $8,000 and could exclude up to $8,000 of canceled debt from income.
Step 4: Complete Form 982 If Applicable
If you qualify for any exclusion, you must file Form 982 (Reduction of Tax Attributes Due to Discharge of Indebtedness) with your tax return. This form tells the IRS which exclusion you're claiming and may require you to reduce certain tax attributes (like basis in property or net operating losses).
Step 5: Report on Your Tax Return
If any amount remains after exclusions, report it as "other income" on Form 1040, Line 21 (for 2013 returns). If the entire amount is excluded, you still file Form 982 but don't report any canceled debt income on Line 21.
IRS Form 1099-C 2013
Common Mistakes and How to Avoid Them
Mistake #1: Ignoring the Form Entirely
Many taxpayers receive Form 1099-C and assume they don't need to report it because they didn't receive actual cash.
Solution: Always report canceled debt unless you qualify for a specific exclusion. The IRS receives a copy of your form and will match it to your return. According to the form instructions, "a negligence penalty or other sanction may be imposed on you if taxable income results from this transaction and the IRS determines that it has not been reported."
Mistake #2: Incorrectly Claiming Insolvency
Some taxpayers claim the insolvency exclusion without properly calculating their financial position.
Solution: Complete the insolvency worksheet carefully (available in IRS Publication 4681). Include ALL debts and ALL assets at their fair market value immediately before the debt cancellation. Don't forget to include retirement account balances, household goods, vehicles, and the value of your home (minus mortgages). You can only exclude canceled debt up to your insolvency amount.
Mistake #3: Confusing Form 1099-C with Form 1099-A
Form 1099-A (Acquisition or Abandonment of Secured Property) is related but different—it reports foreclosures or abandonments.
Solution: If you received both forms for the same transaction, read them together. Sometimes creditors file only Form 1099-C and complete boxes 4, 5, and 7 to cover the Form 1099-A reporting requirements. You may have two separate tax consequences: gain or loss from the property disposition AND canceled debt income.
Mistake #4: Forgetting to File Form 982
Even if you qualify for an exclusion, you must file Form 982 to claim it.
Solution: Download Form 982 from IRS.gov, check the appropriate exclusion box(es), enter the excluded amount, and attach it to your tax return. Without Form 982, the IRS will assume the full canceled amount is taxable income.
Mistake #5: Claiming the Qualified Principal Residence Exclusion for Non-Qualified Debt
The Mortgage Forgiveness Debt Relief Act (available through 2013) only applies to debt forgiven on your principal residence that was used to buy, build, or substantially improve that home.
Solution: Cash-out refinances used for other purposes (like paying credit cards or buying a car) generally don't qualify. Keep documentation showing how mortgage proceeds were used.
Mistake #6: Not Disputing Incorrect Amounts
Sometimes creditors report incorrect canceled debt amounts.
Solution: Contact your creditor immediately if the amount in Box 2 doesn't match your records. Request a corrected Form 1099-C. Document all communications in case of future IRS inquiries.
IRS Instructions for Forms 1099-A and 1099-C 2013
What Happens After You File
Immediate Processing
Once you file your 2013 tax return including the Form 1099-C information (either as taxable income or with Form 982 claiming an exclusion), the IRS's computer systems will match your return against the Form 1099-C filed by your creditor. If everything matches, your return processes normally.
If Amounts Don't Match
If you don't report the canceled debt and don't file Form 982, the IRS will likely send you a notice proposing additional tax on the unreported income. This notice will include the tax due, plus penalties and interest calculated from your original return's due date. You have the right to respond with documentation supporting your position (such as proof of insolvency).
Recordkeeping Requirements
Keep your Form 1099-C, Form 982 (if filed), insolvency worksheets, and all supporting documentation for at least four years after your tax return due date. According to the IRS instructions, creditors required to file Form 1099-C "must retain a copy of that form or be able to reconstruct the data for at least 4 years from the due date of the return." Taxpayers should follow similar practices to protect themselves if questions arise.
Future Tax Implications
If you claimed the insolvency exclusion and filed Form 982, you may need to reduce certain "tax attributes" like the basis in your property or net operating loss carryforwards. This can affect future tax years. For example, if you reduce your home's basis, you might have a larger gain when you eventually sell it.
State Tax Considerations
While federal law provides exclusions for canceled debt, state tax treatment varies. Some states conform to federal exclusions; others don't. Check your state's tax rules or consult a tax professional to ensure proper state reporting.
Credit Report Impact
The debt cancellation will appear on your credit report and typically remains for seven years, negatively affecting your credit score. This is separate from the tax implications but important to understand as part of the overall financial impact.
IRS Instructions for Forms 1099-A and 1099-C 2013
FAQs
Q1: Do I have to pay taxes on canceled debt shown on Form 1099-C?
Not always. While canceled debt is generally taxable income, you can exclude it if you qualify for exceptions like bankruptcy, insolvency, qualified principal residence indebtedness (for debts canceled through 2013), or qualified farm debt. You must file Form 982 with your tax return to claim these exclusions. If you don't qualify for any exclusion, you must report the canceled debt as "other income" on your Form 1040.
Q2: I received a Form 1099-C, but I'm still getting collection calls. Do I still owe the debt?
This is confusing for many taxpayers. Receiving Form 1099-C doesn't necessarily mean the debt is legally unenforceable. The IRS requires creditors to issue Form 1099-C when certain "identifiable events" occur, including the expiration of a 36-month nonpayment period. However, state laws governing debt collection may still allow the creditor to pursue collection. Consult an attorney about your legal obligations, but understand that for tax purposes, you must report the canceled debt in the year shown on the form.
Q3: What if the amount on my Form 1099-C is wrong?
Contact your creditor immediately to request a corrected Form 1099-C. The form instructions note: "If you do not agree with the amount, contact your creditor." Document your communication and keep records of the correct amount owed. If the creditor refuses to correct it or doesn't respond in time for you to file your return, file your return with the correct amount and attach a statement explaining the discrepancy with supporting documentation.
Q4: Can I claim insolvency if I own a home?
Yes, but you must include your home's fair market value (not what you paid for it) in your assets calculation, and subtract all mortgages against it. For example, if your home is worth $200,000 but you owe $220,000 on mortgages, you have negative equity of $20,000, which contributes to insolvency. Many people are surprised to learn they're insolvent when they properly account for all debts and assets.
Q5: I received Form 1099-C for a debt from several years ago. Which tax year do I report it?
Report the canceled debt in the tax year shown in Box 1 (Date of Identifiable Event) on Form 1099-C, not necessarily when you receive the form. If the identifiable event date is 2013, report it on your 2013 tax return, even if you received the form in 2014. If the date is for a prior year and you've already filed that year's return, you may need to file an amended return for that year.
Q6: Do I need Form 1099-C to report canceled debt?
No. According to the form instructions: "If a creditor has discharged a debt you owed, you are required to include the discharged amount in your income, even if it is less than $600, on the 'Other income' line of your Form 1040." The $600 threshold is a reporting requirement for creditors, not an exclusion for taxpayers.
Q7: What happens if I ignore Form 1099-C?
The IRS receives a copy of every Form 1099-C filed, and its computers will match these forms against your tax return. If you don't report the canceled debt and don't file Form 982 claiming an exclusion, the form instructions warn that "a negligence penalty or other sanction may be imposed on you if taxable income results from this transaction and the IRS determines that it has not been reported."
IRS Form 1099-C 2013
Additional Resources
- IRS Publication 4681 (Canceled Debts, Foreclosures, Repossessions, and Abandonments): Comprehensive guide for taxpayers who receive Form 1099-C
- Form 982 (Reduction of Tax Attributes): Required form to claim exclusions from canceled debt income
- 2013 Instructions for Forms 1099-A and 1099-C: Available at IRS.gov
- Form 1099-C (2013): Available at IRS.gov
For personalized guidance, consider consulting a tax professional or enrolled agent, especially if your situation involves insolvency calculations, multiple canceled debts, or bankruptcy proceedings.
