Let’s say you owe $10,000 in school loans. You’ve paid $6, 000 dollars to the lender towards the balance, and the lender decides they are going to forgive the rest of the debt. Woohoo! However, the IRS says that forgiven debt is income. Accordingly, you indirectly received $4,000 of taxable income. You need form 1099 C.
When debt is forgiven, the lender is required to issue you a 1099 C, disclosing the forgiven debt. A copy of the form also goes to the IRS.
When you file your tax return, the IRS is going to look to match the copy of form 1099 C they received from the lender, against the income reported on your return. If things don’t match, they’ll be getting in touch with you.
A 1099 C is issued when a debt of more than $600 is forgiven by lender. Some common instances when you might experience debt forgiveness are in a home foreclosure and sale or in the event of a bankruptcy. It’s important to note that in certain cases, when the recipient of the “income” is insolvent, there may be exclusions from being taxed on the income.
More information regarding the 1099 C can be found.
If you’re looking for more financial help, visit https://www.nthdegreecpas.com/contact/