Received a 1099-C...Now What?

Around tax time, many people receive a 1099-C form and usually do not know what to do about it.

Here is some very important information on not only why you received it, but what to do about it:

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You need to understand:

  • Why you received the 1099-C.
  • Why you cannot ignore.
  • If you will have have to pay more tax
  • How to file with your tax return.

 

 

Anytime a creditor accepts less than the full balance due and the "forgiven" amount (the difference between the actual balance and the amount you paid) is greater than $600, the creditor most likely will report it to the IRS.

I said "most likely" because not all creditors will report a settlement/forgiveness.

If they do, then you will receive an IRS Form 1099-C that shows the creditor, the amount given and some general instructions on what to do.

Of course, typically with the IRS, the form is somewhat vague and not very clear as to what you need to do.

So, let's walk through this....

WHY DID YOU RECEIVE A 1099-C?

If you cannot make the required minimum payments on your credit cards or other unsecured debts, after a certain amount of time (usually 3-4 months) the creditor may sell or transfer the debt to a debt collection agency.

The original creditor will most likely write the balance off as a loss (to offset their tax reporting) and usually sell the debt at "pennies on the dollar".

Let's say that the debt collector/debt buyer bought your Visa Card debt of $5,000 for $500...(yep, the get these very, very cheaply!)

Now, you start getting calls and letters from the debt collector saying you owe the $5,000 to them (even thought they only paid $500).  Starting to get the point?

Oh, by-the-way, once the account has been sold or transferred from the original creditor, you can put a stop to the phone calls:

STOP Collection Calls Free Sample Letter

But, even though you stop the calls, the amount you owe still remains!

Depending on your specific circumstances you may have gone through or are going through, the debt collector/buyer may be willing to accept a SETTLEMENT.

A settlement is an agreement to accept less than the full amount to satisfy the debt, usually saving you 40%-60%.

Recent Settlements See what we have  done for our clients!

The difference between the balance owed and the amount accepted as a settlement is called a "FORGIVEN" amount by the IRS, and as I said before, you most likely will received a 1099-C form because of it.

 

YOU CANNOT IGNORE THE 1099-C!

 

We get calls from clients all the time who received the 1099-C, ignored it, filed their income taxes as usual, and then, a few months later, start getting letters from the IRS saying they own more money plus penalties and interest!

And, even though you can file an amended return in hopes of getting this taken care of, it is a lengthy, time consuming process now.

The time to deal with the 1099-C is now....not later!

 

Just because you receive a 1099-C doesn't necessarily mean that you will have to pay more tax.

 

Let's say that the Visa Card that had a balance of $5,000 and was sold to XYZ Collectors, was ultimately settled for $2,000.

Good deal!, you just saved $3,000!

Well, that's true, but, the IRS looks at it as if you had received $5,000 of goods and services, but only paid $2,000, so you had an additional $3,000 added back to your gross income for that year.

Now your total adjusted net income (the amount you will have to pay tax on after all deductions and credits are deducted from your gross income) is increased by $3,000.

If the TAX RATE (the percentage of the adjusted net income) was 20%, then you would owe an additional $3,000 x 20% or $600 more tax! (not including penalties and interest!).

But, if you had read the fine print of the 1099-C you received, it said that (paraphrasing here) that...

 you may be EXEMPT if you were INSOLVENT at the time of the FORGIVENESS.

 

What does "INSOLVENT" mean and how do you show or prove to the IRS that you were? 

 

How do you file with the IRS?

 

You must provide the IRS with a little information and the proper forms (specifically IRS Form 982).

Basically, you are going to show that at the time of forgiveness (the settlement) you had more LIABILITIES (debt owed) than your ASSETS (all equity, bank accounts, etc.)

If this is the case, then you DO NOT have to include the FORGIVEN amount as additional income and therefore, and will not have to pay any additional tax!

But, you have to provide/include the proper documentation and form with your tax return.

 

Don't be surprised if your tax-preparer doesn't know what to do with the 1099-C and don't "just pay the extra tax" as a result!!!

 

Just click below, follow the instructions:

FREE DOWNLOAD 1099-C PACKET

 

 

FREE  Debt Elimination Summary

 

 

 

 

Tags: secured credit card, 1099-C, IRS, tax on forgiveness of debt, settlement

How to Avoid Additional Tax After Receiving a 1099-C

If you had a debt settled or "forgiven" in IRS lingo, and it was for more that $600, you most likely will receive a 1099-C.  But, you may not be required to pay additional tax on the forgiven amount, but YOU MUST FILE THE CORRECT FORMS AND DOCUMENTATION

We have prepared a simple, easy-to-use instruction packet for you. 

Get yours now:

FREE DOWNLOAD 1099-C PACKET

Receiving an IRS Form 1099-C is a little scary, but if you look closely at the form, you will see something like this:

"...do not include canceled debts in your income to the extent you were insolvent immediately before the cancellation of the debt.  If you exclude a canceled debt from your income, file Form 982."

OK, now what?

First, at the time of settlement (most likely last year), were you INSOLVENT?

According to the IRS, "insolvent" means that your debts (all liabilities, not just this settled debt) were greater than your assets (net worth).

You'll need a simple, Basic Financial Worksheet:

Budget Worksheet FREE Download here!

 

You will list all of your assets, net value of your home, autos, etc.  Most people who have have debts settled would have had little if any equity in their home and/or auto. 

You most likely have little or no savings, hence the financial hardship that helped lead to using DEBT SETTLEMENT to eliminate your debts!

Once you have completed the Financial Worksheet, if your LIABILITES were greater than your ASSETS at the time of the settlement, then you were 'INSOLVENT".

NEXT...COMPLETE IRS FORM 982

We have included Form 982 with the FREE 1099-C PACKET.  If you haven't requested the FREE DOWNLOAD, click on the button above.

Follow the instructions to compete the Form 982. It's so simple.

It is a good idea to include a short explanation of your financial situation.

Just a brief note (can be handwritten, but make it legible).

So now you should have completed:

  • Financial Worksheet showing your were insolvent at the time of the debt forgiveness
  • Form 982
  • Brief note of your financial circumstances at the time

Make a copy for your records and then send all of the above along with your tax return to the  IRS.  You should send via Priority Mail so that you will have proof that the IRS received it, but don't ask for a signature, as this may delay the process.  You can track delivery online.

Don't be surprised if your accountant and/or tax preparer is not aware or does not know how to complete the Form 982.  Just download and print the FREE 1099-C Packet for them.

If you have alreadly filed your tax return and before you received the 1099-C, you will need to file an amended form along with the 982 and other documents.  You should probably seek the help of a qualified tax specialist for this.

Hope this helps! 





Tags: insolvent, form 982, 1099-C, IRS Form 982, IRS, additional taxes

Don't Ignore Your Tax Bill!

do not ignore your tax billIf you owe taxes to either the IRS or to your state, don't ignore your tax bill!

Some people realize that they either have not had enough money withheld over the year or due to self-employment and/or payroll tax for business owners, they owe more money...but just don't have it.

What should you do?

MAKE SURE YOU FILE THE TAX RETURN!

If you fail to file, you will be facing LATE FILING FEES, PENALTIES AND INTEREST.  The worst thing you can do is to ignore you tax bill.  IT WON'T HELP OR SOLVE THE PROBLEM!

YOU CAN FILE AN EXTENSION!

By filing an extension (by April 15th) and you have until October 15th to submit the completed return.

If you can submit an estimated amount that you owe (close to the same as last year) with your extension, it will help reduce the interest and penalties that start to add up.

Something is better than nothing!

CONTACT THE IRS TO DISCUSS YOUR OPTIONS

Don't be afraid to call the IRS to explain your situation and find out what you can do to help yourself.  However, be prepared to be on the phone for a long, long time!  Wait times can be 45 minutes to an hour or more.

When you finally get an IRS representative, you may or may not be able to understand them.  I'm not talking just about language differences, but some agents are just not very easy to understand and/or are not very pleasant people!

My advice...hang up and call again.  Ultimately, you should get connected to someone who can help.  The idea that all IRS agents are mean, hard-hearted people is just not true!

YOU MAY QUALIFY FOR AN INSTALLMENT PLAN

If you file your taxes on time (by April 15th) or if you file an extension, you may be able to set up an installment payment plan.

You can go on line to get the IRS Form 9465.

Click here to get a copy of instructions for IRS Form 9465.

Payments can be made by mail or you can set up automatic payments.

YOU MAY BE ABLE TO NEGOTIATE A REDUCTION IN YOUR TAX BILL!

If you owe several thousands of dollars of taxes, you may be able to negotiate a reduction.  This is called "an offer in compromise" and it is similar to a DEBT SETTLEMENT AGREEMENT.

  • Be careful of the ads on TV that promise to reduce your tax bill by 80%-90%!
  • You have to pay for their services (which if they could deliver wouldn't be so bad), but before you lay out any money, you need to see results!

BOTTOM LINE...

  • DON'T IGNORE YOUR TAX BILL!
  • FILE A RETURN AND/OR EXTENSION BY APRIL 15TH
  • CONTACT THE IRS
  • YOU MAY QUALIFY FOR AN INSTALLMENT PAYMENT PLAN
  • YOU MAY BE ABLE TO NEGOTIATE A TAX REDUCTION

If you need help, let us know!


 

Tags: IRS, taxes, penalties, interes, IRS form 9465, do not ignore your tax bill