Form 1099-C

Why do you need to file a 1099-C?

If you’re a creditor or financial institution, you might need to issue a 1099-C form when you cancel or forgive a debt. It’s not the debtor’s responsibility to file the 1099-C; instead, it’s the responsibility of the entity that forgave the file debt. Here’s why it’s necessary:

IRS Requirements

• The Internal Revenue Service (IRS) requires creditors to report canceled debts of $600 or more using the 1099-C form. This is because, in many cases, canceled debt is considered taxable income for the debtor.

Tracking Purposes

• The 1099-C serves as an official record of the canceled debt. By requiring entities to file this form, the IRS can better ensure that taxpayers are reporting and paying taxes on this type of income.

Transparency

• By sending a 1099-C to the debtor and the IRS, it provides clear communication that a certain amount of debt was canceled, ensuring the debtor is aware of potential tax implications.

Potential Penalties for Non-compliance

• Creditors or financial institutions that fail to file required 1099-C forms may face penalties from the IRS.

If you’re an individual who receives a 1099-C form because a debt you owed was canceled, you don’t “file” the 1099-C in the same way the creditor does. Instead, you’ll use the information from the form to report the canceled debt as income on your tax return, unless you qualify for an exclusion or exception.

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Who needs to file a 1099-C?

The responsibility to file a 1099-C lies with the “applicable entity” that cancels a debt, not with the debtor. In the context of the 1099-C, the term “applicable entity” typically refers to the creditor or financial institution that originally lent the money or provided the credit.

Financial Institutions

• This includes banks, credit unions, and other entities in the business of lending money.

Federal Government Agencies

• This could be for federally guaranteed student loans, for example.

Certain Other Organizations

• This might include organizations that are in the business of lending money and have significant trade or business of lending money, such as finance companies.

These entities are required to file a 1099-C form with the IRS and send a copy to the debtor when they cancel or forgive a debt of $600 or more. If they fail to do so, they may be subject to penalties by the IRS.

The debtor, upon receiving a 1099-C, does not “file” it in the same way. Instead, they use the information on the form to potentially report the canceled debt as income on their tax return, unless an exception or exclusion applies.

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Are there any exemptions to filing a 1099-C?

Yes, there are certain situations where a creditor or applicable entity is not required to file Form 1099-C for canceled debts. Some of the exceptions and exemptions include:

Certain Bank-Related Financial Institutions

• For instance, FDIC-insured banks, credit unions, etc., don’t have to issue a 1099-C for loans they’ve written off if they haven’t received interest payments on them for at least 26 months and won’t try to collect the debt in the future.

Non-Principal Amounts

• Only the principal portion of the canceled debt is required to be reported. So if any interest or penalties are forgiven but were not included in the original loan amount, they wouldn’t necessarily be reported on the 1099-C.

Interest Reporting

• If a financial entity separately reports the interest portion of a canceled debt to the IRS, they don’t need to include that interest on Form 1099-C.

Certain Student Loans

• If a student loan is canceled due to the student working in a profession for a specified period of time and in a certain location (e.g., a doctor working in a low-income area), the cancellation of that debt does not need a 1099-C.

Purchase Price Reductions

• If the debt canceled is intended as a purchase price adjustment or reduction, it may not need to be reported.

Bankruptcy

• Debts discharged through bankruptcy generally do not require a 1099-C from the creditors.

Gifts

• If the cancellation of the debt is intended as a gift, it’s typically not reported on Form 1099-C.

It’s important for creditors to be aware of these exemptions and understand when they apply. If there’s ever doubt about the need to file a 1099-C or about any potential exemption, consulting a tax professional or legal counsel can provide clarity.

For debtors, even if they don’t receive a 1099-C, it’s essential to be aware that they might still have taxable income from the canceled debt.

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What is the deadline for filing a 1099-C?

The deadline for filing a 1099-C can vary based on the several factors:

Sending to Recipients

• The 1099-C form should be furnished to the recipient by January 31 of the year following the payment year.

Filing with the IRS

• If you are filing on paper, the 1099-C forms should be submitted to the IRS by February 28 (or the last day of February) of the year following the payment year.
• If you are filing electronically, the deadline extends to March 31 of the year following the payment year.

However, if any of these dates fall on a weekend or a holiday, the deadline may be extended to the next business day. Additionally, if you discover an error after the initial filing, there are separate deadlines for corrected 1099-C forms.

Remember, missing these deadlines can result in penalties, so it’s crucial to stay informed and act timely.

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What is required to file a 1099-C?

To file a Form 1099-C, you will need certain information about both the payer (the person or business making the payment) and the recipient (the person or business receiving the payment). Here’s what is required to file a 1099-C:

Information about the Payer (Creditor)

• Payer’s Name and Address
  • Provide your legal business name and mailing address.
• Payer’s Taxpayer Identification Number (TIN)
  • This could be your Employer Identification Number (EIN) or your Social Security Number (SSN), depending on your business structure. If you’re a sole proprietor, you might use your SSN; if you’re a business entity, you’d use your EIN.
• Payer’s Phone Number
  • Include a phone number where the payer can be reached.

Information about the Recipient (Debitor)

• Recipient’s Name and Address
  • Provide the legal name and mailing address of the individual or business receiving the payment.
• Recipient’s Taxpayer Identification Number (TIN)
  • This could be the recipient’s Social Security Number (SSN) if an individual or their Employer Identification Number (EIN) if a business entity.

Form specific information

• Box 1 – Date of identifiable event
• Box 2 – Amount of debt discharged
• Box 4a – Debt description (line 1)
• Box 6 – Identifiable event code

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What are the penalties for 1099-C?

Please see the penalties section for details.

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Do you need to e-file a 1099-C?

Please see the e-file section for details.

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Is state filing required for the 1099-C?

Currently, the 1099-C form does not have a place to enter state information.

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What elements make up a 1099-C form?

The 1099-C contains several boxes, each designed to report specific types of income or information. Here is a breakdown of the boxes on the 1099-C:

Box 1 – Date of identifiable event

Enter the date of the identifiable event. See When Is a Debt Canceled, earlier. However, if you actually cancel a debt before an identifiable event and you choose to report that cancellation, enter the date that you actually canceled the debt. Box 2.

Box 2 – Amount of debt discharged

Enter the amount of the canceled debt. The amount of the canceled debt cannot be greater than the total debt less any amount the lender receives in satisfaction of the debt by means of a settlement agreement, foreclosure sale, a short sale that partially satisfied the debt, etc.

Box 3 – Interest, if included in box 2

Enter any interest you included in the canceled debt in box 2. You are not required to report interest in box 2. But if you do, you must also report it in box 3.

Box 4 – Debt description

Enter a description of the origin of the debt, such as student loan, mortgage, or credit card expenditure. Be as specific as possible. If you are filing a combined Form 1099-C and 1099-A, include a description of the property.

Box 5 – Debtor was personally liable for repayment of the debt

If the debtor was personally liable for repayment of the debt at the time the debt was created or, if modified, at the time of the last modification, enter an “X” in the checkbox.

Box 6 – Identifiable event code

Enter the appropriate code to report the nature of the identifiable event.

Box 7 – Fair market value of property

FMV which should also include the appraised value of the property if the property is sold in a short sale.

Remember, not all boxes will be filled out on every 1099-C form. Only the relevant boxes for the specific payments made will have amounts or indicators.

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Can you correct a 1099-C?

Yes, you can correct a 1099-C. Please see the corrections and negations section for details.

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