Cancellation Of Debt

What to Do If You Receive a 1099-C Cancellation of Debt

If you've received a 1099-C form from a bank, lender, or other creditor, it means a portion of your debt has been canceled. While that may sound like a relief, there’s a catch: the IRS treats canceled debt as taxable income. And if you didn’t include it on your Form 1040, you could soon receive a notice demanding additional taxes plus penalties and interest.

But here’s the good news: not all canceled debt is actually taxable. With the help of a skilled tax attorney, you may be able to avoid paying taxes on this income entirely.

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What Is Form 1099-C?

 

A 1099-C Cancellation of Debt form is issued by a financial institution when it cancels or forgives $600 or more of your debt. This could include:

 

  • Credit card debt
  • Foreclosure or short sale of real estate
  • Repossession of a vehicle
  • Settled loans or collections
  • Business debt write-offs

 

Once issued, the IRS receives a copy and expects you to report the canceled amount as income on your federal tax return.

Why the IRS May Come After You

If you fail to report the amount on your tax return, the IRS may send you a CP2000 notice or other letter, asserting that you owe taxes, penalties, and interest on the “unreported income.”

For many taxpayers, this can come as a shock, especially when the amount of canceled debt is large.

 

Is Canceled Debt Always Taxable?

No. There are several exceptions and exclusions under IRS rules. A knowledgeable tax attorney can help determine if you qualify for one or more of the following:

Common Exclusions:

  • Insolvency: If your total debts exceeded your total assets at the time the debt was canceled, the forgiven amount may not be taxable.
  • Bankruptcy: Debt discharged through bankruptcy is not considered taxable income.
  • Qualified Principal Residence Indebtedness: Forgiven mortgage debt on your primary home may be excluded under certain conditions.
  • Qualified Farm or Business Real Property Debt: Certain business-related debts may be exempt.

Don’t Automatically Pay. Get Legal Advice First

The IRS wants you to believe that all canceled debt equals taxable income. But the reality is much more complex. That’s why you shouldn’t automatically agree to pay the tax bill, especially before speaking to a qualified tax attorney.

An experienced tax attorney can:

  • Analyze your financial situation to determine if you qualify for an exclusion
  • Represent you in IRS negotiations
  • File amended returns if needed
  • Help reduce or eliminate penalties and interest

How We Can Help

Scott Scamahorn understands both federal tax law and how to challenge IRS determinations effectively. If you received a CP2000 notice or just got your 1099-C in the mail, legal guidance can save you thousands of dollars and a lot of stress.

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Take Action Before the IRS Does

The worst thing you can do is ignore a 1099-C or a follow-up notice from the IRS. The sooner you take action, the more options you have.

Schedule a Confidential Consultation Today.

 

We’ll review your case and help you determine the best path forward. 

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