IRS Form 1099-A vs. Form 1099-C

One of the more confusing issues in reporting taxable income is what to do when there is a 1099-A or 1099-C involved. Sometimes both the A and the C refer to the same property, other times not. Here is a simple way to think about the issue.

    1. The 1099-A is required from any creditor when a borrower abandons real or personal property. This is not a taxable event. The purpose of the form seems to be only to alert the IRS that a taxable event is likely coming.
    2. The 1099-C on the hand is issued by a financial institution whenever it cancels debts of more than $600. This usually means that the finance company has given up on collecting the debt and written it off.

The 1099-C is what the IRS is going to attempt to match to the related tax return. The problem is that just because there is an amount on a 1099-C, it is not necessarily all taxable. There are several exceptions that the taxability of debt cancellation including:

    1. Cancellation of debt in a title 11 bankruptcy case. Use Form 982 to report the reduction in tax attributes for canceled debt.
    2. The amount that the taxpayer is insolvent immediately after the discharge. See Pub 4681 for their nifty worksheet to calculate solvency.
    3. A discharge that is characterized as a gift.
    4. A discharge that would produce an offsetting deduction.
    5. A purchase price reduction that reduces the asset basis.
    6. Certain student debts.

All 1099-Cs should be reported to avoid problems with the IRS matching program. Use a disclosure note to explain your reductions when one of the exceptions applies.

Author: Jim Payne

Jim Payne, a Florida Certified Public Accountant (CPA) since 1976, offers candid insights on getting square with the IRS — with the least pain, and at the lowest cost — with (or without) the help of a tax representative. Mr. Payne is a former IRS agent and expert in business profitability, IRS audits, IRS payroll tax, and IRS non-filer issues. As a Tax Representative, his goal is clear: " I will speak on your behalf to all IRS agents, so you never have to, and I'll guide you in executing a strategy to resolve your IRS problem so you can get back to enjoying life."

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