Did you receive a 1099-C or 1099-Misc Form after your debt was discharged in bankruptcy after you settled your debt and/or with erroneous or incorrect information? What can you do?
- If the information is incorrect then dispute the information.
- For a debt that was listed in your Bankruptcy and included in your order of Discharge, file a form with your tax return.
- For the amount ‘forgiven’ in your settlement agreement, determine whether or not you were ‘insolvent’ when the debt was forgiven.
To Dispute Incorrect Information:
Contact the Issuer and explain what needs to be corrected.
- Gather proof to support your dispute
- Speak with the Accounting Department for the Issuer and explain that you are disputing the 1099 that you received. Offer to provide your documents as proof of your dispute. If they agree with you then they need to contact the IRS and tell them it was sent in error. If you are unable to reach an agreement then contact the IRS, after February 14th at 800-829-1040 and explain your situation. The IRS will contact the Issuer and request a correction.
- If the Issuer does not file a corrected 1099 with the IRS or provide proof of why the original is correct, by the tax deadline, April 15th, file your taxes on time and include a statement with your proof attached behind the 1040 or Schedule C portion of your tax return, before any of your other schedules. If you are using a computer program that allows you to efile, don’t. Mail your return. You may also use Form 4852 to show the corrections. On the line to list the 1099 information add “See Statement” or “See Footnote”. Here is an example for your Statement or Footnote:
|Erroneous Form 1099-MISC
|Less Error Amount
|| $ 70,000
|Net to (Schedule C or Wage Earner Return)
|| $ 30,000
- Adding a statement may reduce your risk of audit, without adding a statement you are practically guaranteeing an audit. The IRS does not get involved in settling these types of disputes so don’t wait to file your return if the Issuer does not cooperate.
For a Debt after Bankruptcy Discharge:
If the debt is forgiven in bankruptcy then you don’t have to pay taxes on that debt. When you file your tax return include a 982 Reduction of Tax Attributes Due to Discharge of Indebtedness. A Bankruptcy is a Title 11 case. There are different types of Title 11 cases such as a Chapter 7 or Chapter 13, so be sure and check the box 1a.
For a Debt that was Settled:
American tax law takes the position that if a creditor forgives a debt, then you, the debtor, has made money. If you settled with the creditor and you were ‘insolvent’ when you settled, you won’t have to pay taxes but you will need to provide proof:
- Make a list of all the debts you owe, including debts such as student loans, debts to family members, everything that you owe everyone on the planet, use Form 982.
- Make a list of all your assets and the fair market value of all your assets, on the other side of Form 982.
- If the value of your assets is less than the amount of your debts and the amount of the 1099-C is less than the difference you will not pay taxes on the 1099-C. For example:
- Your Debts total $100,000
- Your Assets are worth $ 75,000
- The difference is $ 25,000
- The 1099-C is for $10,000, you don’t have to report the 1099-C as income on your tax return.
- The 1099-C is for $50,000, you have to report the 1099-C as income, see your tax preparer for the amount that is considered income.