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Do I owe 1099-C tax on debt that’s past statute of limitations?

The IRS can pursue taxes on forgiven debt, but there are ways to prevent it


A reader worries about paying tax on forgiven debt that is past its statute of limitations.

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If you’ve ever accumulated credit card debt that you couldn’t repay and the issuer forgave the debt, that lender should also have sent you a 1099-C notice.

That’s because forgiven debt is not an unmitigated blessing. You will owe taxes on any debt that was forgiven since the Internal Revenue Service considers this amount as income for you. So while you will be relieved at not having to pay back the forgiven debt, you will not be off the hook for taxes on the amount forgiven. You should get a 1099-C notice for any debt of $600 or more that was canceled.

Reader Dean has received a 1099-C form and sent in a query relating to this. He says, “I was made aware of a 1099-C cancellation of debt by the IRS. I was never sent the 1099-C. It should have come from Bank of America. I lived in Oregon and the statute of limitations has expired for this (six years). The debt was from 2010.

“Any advice? I am retired and on Social Security. So this bill is a HUGE burden and impossible to pay outright. It increased my tax burden by 3K.”

Check out all the answers from our credit card experts.

Ask Poonkulali a question.

IRS reporting applies even past statute of limitations

If a creditor has decided to give up on collecting a debt that is past its statute of limitations, it still generally has to report to the IRS that the debt has been canceled since the statute of limitations for collecting the debt has expired.

The IRS states that this reporting would be triggered “when a debtor’s affirmative statute of limitations defense is upheld in a final judgment or decision of a court and the appeal period has expired.”

Derek R. Caldwell, a Raleigh, North Carolina, bankruptcy attorney advises on, in response to a reader question on that forum, “The creditor is not attempting to collect the debt at that time, they are telling the IRS that they have not only stopped trying to collect that debt, they have forgiven it and the debtor has no further obligation to pay that debt.

“They don’t really have a choice in the matter, the IRS requires them to report debt forgiven if the amount is $600 or above. Doesn’t matter if the reason the debt is forgiven is that the statute of limitations has expired, they still have to report it. It is the IRS that you will eventually owe the taxes to, not the creditor.”

Another point to note is that the IRS faces a statute of limitations in collecting on tax amounts due. The agency has a 10-year period to collect these amounts from the date of assessment.

Pleading insolvency or bankruptcy

While most taxpayers will be happy enough that they will only pay tax on canceled debt, there are those who will still struggle even to come up with the tax owed on this canceled debt.

There are ways to maneuver around this pitfall though. For one, if you had discharged the canceled debt in bankruptcy, you would not have to pay taxes on the canceled amount.

And if you were insolvent at the time of debt cancellation – your liabilities (what you owe others) exceeded your assets (what you own) –­­ that would be another defense against paying taxes on this amount. Those who claim this defense would typically also file an IRS form 982 to go this route.

If your debt was discharged in bankruptcy, it could have a negative impact on your credit report for up to 10 years. And if it became delinquent or went into collections, there would be a negative credit impact for up to seven years, starting from the date of first delinquency.

See related: 6 exceptions to paying tax on forgiven debt

Bottom line

Dean, even though your lender didn’t report the canceled debt, you should have reported it to the IRS at the time it was canceled. If you had discharged the debt in bankruptcy or been insolvent at that time, you could have avoided paying taxes on the forgiven amount.

It seems you would still feel a pinch to pay this bill. You should consult a low-fee or pro bono attorney to give you appropriate advice. You could even work out a payment plan with the IRS. Good luck sorting out your situation!

Contact me at with your credit card-related questions.

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