When you use credit or take out a loan, that borrowed money is money you can use. If you don't pay off the credit or loan, and the creditor cancels the debt, you may receive a 1099-C from the creditor. The "C" in this form stands for cancellation of debt. The IRS categorizes the credit you originally received as income. This means (if the cancelled debt was over 600 dollars), you need to report the 1099-C on your tax return.

Yep, Uncle Sam gets a cut of the portion of your debt that was forgiven or discharged. There are, however, exceptions to being responsible for paying any taxes on a 1099-C form.

Don't be alarmed if you receive a 1099-C. The IRS considers 1099-C as income ONLY to the amount a person is not insolventInsolvent means your assets are worth less than the total amount of alldebt you owe. For example, if you have assets worth twelve thousand dollars but owe 20,000 in debt, you are insolvent in the amount of 8000 dollars. The value of assets is determined by what price they would get at auction – which usually means prices lower than you would get at a garage sale. The amount of debt you have includes all debt you owe: mortgage, auto loans and any outstanding bills.

When you receive a 1099c form, if you aren’t required to file tax returns then you don’t have to do anything. Your income is so small that the IRS will generally do nothing. In the unlikely event that the IRS sends an inquiry regarding the 1099c, here’s what to do:

• Send a simple letter to the IRS with a completed IRS form 982. he form is located at the IRS' website here: https://www.irs.gov/pub/irs-pdf/f982.pdf In the letter you will include a Statement of Assets and Liabilities, which can be handwritten on a piece of notebook paper if necessary. Remember to list the value of your assets as what they would sell for – not what you paid for them. The IRS wants auction value, which is probably even less than garage sale value. Be sure to reference your Social Security number. Please note that it’s possible that the IRS will later ask you to file a return. However, that is very unlikely.

If you receive a 1099c form and you will be filing tax forms with the IRS, here’s what to do:

• File IRS form 982 with your 1040 income tax form. The form is located at the IRS' website here: https://www.irs.gov/pub/irs-pdf/f982.pdf.
• Simply list the dollar amount shown on the 1099c and indicate 1. (b) on the 982 form that you are insolvent.

 If your tax preparer says you will owe taxes for the “income’ on a 1099c form, show him this webpage. Direct him to this helpful webpage explaining how a form 982 and the insolvency rule work: https://www.irs.gov/forms-pubs/about-form-982 Alternatively, contact HELPS. Too many tax preparers do not know about or understand form 982 and the insolvency rule for cancelled debt. If you are insolvent, the amount listed on your 1099-C form is reduced by the amount of your insolvency.

Learn More About Other Issues and What HELPS Can Do For You.