Forgiven debt resurfaces at tax time

The IRS is one creditor you cannot ignore

The Credit Guy columnist Todd Ossenfort
Todd Ossenfort has been chief operating officer for Pioneer Credit Counseling since 1998. He writes our weekly "The Credit Guy" column, answering reader questions about credit counseling and debt issues.

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Question for the expert

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

Answer for the expert

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 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

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Updated: 11-20-2017