Forgiven debt resurfaces at tax timeThe IRS is one creditor you cannot ignoreBy Todd Ossenfort
Dear Credit Guy,
I
have received a 1099-C for a very old debt. It has to be 2002 or earlier for
$14,000. I'm not sure the debt is even mine. How can I question it at this
point? How can I question it with the collection agency or with the IRS?
-- Ruth
Dear Ruth,
Hindsight
is always 20/20 and perhaps other readers can learn from you. Your predicament
is a perfect example of how important it is to check your credit report every six
months or, at the very least, annually. Had you checked your credit report, it
is likely the debt associated with the 1099-C would have been listed, and you
could have dealt with it before the form was filed with the IRS. No one likes
surprises, especially those that involve the IRS. You can check your credit
reports from each of the three major credit bureaus once a year for free at annualcreditreport.com. Now for your
question.
On
the 1099-C form you will find the name, address and phone number of the
creditor that issued it. I would recommend you start by calling the creditor
and requesting information regarding the debt reported as forgiven on the
1099-C form issued by them. Let them know you are disputing the debt and
request debt verification.
As
an historic side note, the IRS did not always require that debt
buyers and collectors issue 1099-C forms for debts forgiven in amounts more than
$600. The Debt Buyers Association (DBA) opposed the IRS rule when it was imposed and filed suit
in January 2006 against John W. Snow, then secretary of the Treasury. DBA lost the
suit and debt buyers and collectors must submit 1099-C forms when specific triggers
set down by the IRS are met. For more clarification, visit the IRS website.
I
mention this because it is unlikely the creditor who filed the form with the
IRS would have done so unless the debt met one of the IRS triggers requiring it
to be filed. Therefore, do not ignore it. The IRS is one creditor you should
never ignore. If you decide not to include the forgiven debt as income on your
tax return, it could initiate an IRS audit. Fees and penalties that accumulate
very quickly will be added to the amount should you indeed owe taxes on the
forgiven income.
I
recommend you contact a qualified tax preparer or attorney for assistance. Be
sure you are speaking with someone who has experience with 1099-C reporting. Let
your tax adviser know that you are disputing the debt, and he or she will know
the best way to proceed with your tax return.
Ruth,
if you find that the debt belongs to you and you are required to claim it as
income on your tax return, you will need a plan to pay the taxes that you owe.
Be sure to file your return on time, even if you cannot make full payment on
the taxes right away. You will be charged a penalty if you fail to file on
time.
If
you need to make arrangement to pay out what you owe the IRS over time, I
recommend that you explore options for borrowing the money and compare those
costs with an IRS payment plan.
Take
care of your credit!
See related: Beware of IRS tax bite that may follow canceled debt, Credit cards and your taxes, Canceled debts will lead to IRS tax
Todd Ossenfort is the chief operating officer for Pioneer Credit Counseling in Rapid City, S.D. Pioneer Credit Counseling has been a member of the Association of Independent Consumer Credit Counseling Agencies since 1997.
The Credit Guy answers a question about a debt or credit issue from a CreditCards.com reader each week.
Send your question to The Credit Guy.
Published: March 8, 2010
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