IRS Form 1099-C, known as the Cancellation of Debt, is issued by creditors when they forgive or cancel a portion of a borrower’s debt. This canceled debt is considered taxable income by the IRS and must be reported on the taxpayer’s return for the year in which the debt was canceled.
Common situations where you might receive a 1099-C include:
- Cancellation of credit card debt
- Mortgage debt forgiveness (e.g., after foreclosure)
- Forgiven personal loans
The amount of the canceled debt is reported in Box 2 of Form 1099-C, and it must be included as part of your gross income unless you qualify for an exclusion. Taxpayers may be able to exclude canceled debt from taxable income in certain cases, such as when the debt was discharged during bankruptcy or when the taxpayer is insolvent at the time the debt was canceled.
To determine if you can exclude canceled debt from your income, taxpayers should file Form 982 (Reduction of Tax Attributes Due to Discharge of Indebtedness) and provide documentation supporting their claim. Failure to report canceled debt can result in penalties and additional taxes owed, so it’s crucial to address any 1099-C forms you receive.