How to File a 1099-C on Your Tax Return

Form 1099-C, Cancellation of Debt, is an informational tax document issued by creditors when they forgive or cancel a debt of $600 or more. This form is sent to both the taxpayer and the Internal Revenue Service (IRS), signaling that the canceled amount is generally considered taxable income. Receiving a 1099-C means a taxpayer must assess whether the canceled debt is indeed taxable or if an exclusion applies.

Understanding Form 1099-C

Creditors, including financial institutions, credit card companies, and even government agencies, are required to issue Form 1099-C when they cancel a debt of $600 or more.

The form provides specific details about the canceled debt:

• Box 1 indicates the “Date of identifiable event,” which is the specific date the debt was canceled or an event occurred that triggered the cancellation.
• Box 2 shows the “Amount of debt canceled,” representing the total principal amount of debt forgiven.
• Box 3, if applicable, details any interest included in the canceled amount.
• Box 4 provides a “Debt description,” identifying the type of debt.
• Box 5 indicates whether the debtor was “personally liable for the debt.”
• Box 6 contains an “Identifiable event code” that explains the reason for the cancellation.

Common codes include ‘A’ for bankruptcy, ‘B’ for other judicial debt relief, ‘C’ for expiration of the statute of limitations, ‘F’ for agreement between the creditor and debtor, and ‘G’ for a creditor’s decision to discontinue collection activity. The amount in Box 2 is the figure the IRS considers as potential income that may need to be reported.

Reporting Canceled Debt Income

If the canceled debt reported on Form 1099-C is taxable, it must be included as ordinary income on the taxpayer’s federal income tax return. The specific location for reporting this income depends on the taxpayer’s situation. For individual taxpayers, taxable canceled debt is generally reported on Schedule 1 (Form 1040), Line 8c, which is designated for “Other income.”

For self-employed individuals or sole proprietorships, canceled debt related to their business is typically reported on Schedule C (Form 1040), Line 6, under “Other income.”

It is important to keep a copy of Form 1099-C for personal records, even though it is not typically attached directly to the tax return. The IRS receives a copy of this form, so reporting the canceled debt, or properly excluding it, is necessary to avoid discrepancies that could lead to an IRS notice or audit. Failing to address a received 1099-C could result in unexpected tax liabilities.

Exclusions from Income

Despite receiving a Form 1099-C, certain circumstances allow taxpayers to exclude canceled debt from their taxable income. To claim an exclusion, taxpayers generally need to file IRS Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, with their federal income tax return.

One common exclusion is for insolvency. A taxpayer is considered insolvent for tax purposes if their total liabilities exceed the fair market value of their total assets immediately before the debt cancellation. The amount of canceled debt that can be excluded due to insolvency is limited to the extent of the insolvency. IRS Publication 4681 provides a worksheet to help determine insolvency.

Debt discharged in a Title 11 bankruptcy case is generally not considered taxable income. This exclusion applies to debt canceled as a result of a bankruptcy proceeding.

Another significant exclusion is for qualified principal residence indebtedness. This applies to debt canceled on a primary home if the debt was incurred to acquire, construct, or substantially improve that residence. This exclusion has limitations.

Other less common but important exclusions include qualified farm indebtedness and qualified real property business indebtedness. Qualified farm indebtedness applies to debt incurred directly in connection with the operation of a farming business. Qualified real property business indebtedness involves debt on real estate used for business purposes. For comprehensive guidance on these exclusions and their specific requirements, taxpayers should consult IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments.

Addressing an Incorrect Form 1099-C

The initial action should be to contact the creditor who issued the form. Explain why the form is believed to be incorrect and request a corrected Form 1099-C, providing documentation that supports the claim of inaccuracy.

If the creditor acknowledges an error, they should issue a corrected form. However, if the creditor is unwilling to correct the form or does not respond, the taxpayer still needs to address the discrepancy on their tax return.

Since the IRS has already received a copy of the original 1099-C, ignoring it could lead to an IRS inquiry. In such cases, the taxpayer should report the amount of canceled debt as shown on the 1099-C but also attach a statement to their tax return. This statement should clearly explain why the reported amount is incorrect or why the canceled debt is not taxable. It should detail the steps taken to resolve the issue with the creditor and provide any supporting documentation.