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What is a 1099c Cancellation of Debt?

Understanding IRS Form 1099-C and Your Taxes

If you’ve received a 1099-C Cancellation of Debt notice, you may not need to take any immediate action. However, such a notice can be of critical importance when it comes time to file your taxes. It’s important to understand why you’ve been sent a 1099c Cancellation of Debt and how to prepare for the hit your taxes may take in April.

What and Why

You’re notified of a cancellation of debt when a balance you owed, perhaps to a creditor, has been either completely or partially reduced. For instance, if your credit card company reduced the amount of your debt by 50% in a settlement offer – bringing a $10,000 balance down to $5000 – you’re sent a Form 1099c. The reason for this is because from the IRS’ viewpoint, the $5000 amount that was forgiven is considered debt cancellation income. In other words, you obtained goods and services which had a monetary value, but ultimately did not pay for them. A copy of the 1099c is sent from the creditor to both you and the IRS, much the same way you would receive a W2 detailing your annual income.

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IRS Debt Cancellation: A Warning

Since the IRS has been made aware of your forgiven debt, it’s essential that you claim the amount on your tax return. As you’re responsible for paying the taxes on the amount that was adjusted, you may think of it simply as an additional $5000 worth of income; rest assured, that’s precisely how the IRS sees it. When it comes to the IRS, debt cancellation is taken as seriously as money paid by your employer. If you don’t report this debt income and pay any corresponding liability, the IRS will quickly detect the discrepancy (remember that your creditor has already tipped them off). Eventually, you’ll receive a friendly notice requesting that you pay the outstanding taxes due, plus penalties and interest.

What to Do If a Cancellation of Debt/IRS Problem Occurs

First and foremost, any notice you receive from the IRS should be taken seriously. It’s possible that you overlooked your cancellation of debt, IRS concerns notwithstanding. You’ll be given the opportunity to correct the situation by paying what you owe (plus any assessed penalties and interest), and the problem goes away.

What you don’t want to do is ignore or discard IRS notices regarding a balance due. You’ll only continue to receive additional letters requesting payment and your balance will only continue to grow. Interest alone can double your liability in just four years, and the IRS can take any future refund you might be due to offset your debt.

Finally, it’s important to remember that the IRS has 10 years to collect on your debt. If you don’t pay up, they can instruct your employer to garnish your wages or take what you owe directly from your bank account. Rather than wait for the worst possible scenario, consult a licensed tax professional at the Tax Defense Network. He or she can provide you with an affordable solution that puts you back on track with the IRS.

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