I received a 1099-C: what is this?
In the last ten years Americans have had a tough time between lack of employment and the credit crunch, many of us were hit hard. Citizens caught in subprime mortgages that they could no longer afford and were unable to refinance due to home price or new credit restrictions. Good credit individuals woke up to find their lines of credit slashed. Regularly employed people were slowly pushed out of the work force. Millions of good honest people fell on hard times.
What does this mean for taxes?
Before the housing bubble burst, many taxpayers could get cash out of their home to pay off back taxes. This doesn’t happen quite as often anymore. If you owe back taxes and want to try and get cash out of your home you may be stuck. Many homeowners have found they have little or no equity in a home they bought at the housing peak.
Many taxpayers were issued 1099s for cancellation of debt when their house was foreclosed or sold in short sale. Others received a 1099 when they modified an unaffordable home loan. These 1099s, in most cases, were not expected and caused taxpayers to under report income on their tax returns. The IRS has come back and told taxpayers they owe back taxes due to this understatement of 1099 income.
What is COD income?
*1 Generally, if you owe a debt to someone else and they cancel or forgive that debt for less than its full amount, you are treated for income tax purposes as having income and may have to pay tax on this income Lending institutions are required to report to their customer as well as the IRS any cancellation of debt income. This is often done in the form of a 1099-C.
Important Questions to ask about COD:
- Is the amount on the form is correct?
- Where you insolvent at the time the “income” event occurred?
- Was this your principal residence?
- Was this a home improvement loan?
- Even if you did not receive a 1099, did you have cancelled debt?
- Was this debt discharged in bankruptcy?
- Was this issued 1099 in connection with a student debt?
Events that may trigger a 1099-C
- Paying off a creditor an amount less than what was owed
- Forgiven amounts on school loans
- Short Sale
- Modification of a home loan
- Settling of less than you owe on a credit card
- Settling for less than you on on a line of credit
- Vehicle Repossession
The Bottom Line:
You may or may not be required to pay taxes on the income reported on a COD form. Never disregard a 1099 you get in the mail or leave it off your taxes all together. If you are unsure what portion if any you are required to pay tax on contact an experienced tax attorney. We are always happy to discuss taxable events that may warrant our intervention. Feel free to call 410-727-6006 and we can discuss your tax controversy.