irs tax form 1099 and uncollected debt
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  1. #1
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    May 2001
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    383

    irs tax form 1099 and uncollected debt

    I received a settlement letter from a ca who stated they would settle for half of the original amount due but the other half would be reported to the irs as uncollected debt and i would be sent a 1099 form for that amount.My questions on this matter are these:If you must report uncollected debt as income than can the uncollected debt never be collected on?If you have to claim it as income shouldnt you be able to deduct all the interest and fees you paid also?I know if you file bankcrupcy you do not have to claim any discharged debt.Does anyone on this board know the rules regarding uncollected debt and the irs?


  2. #2
    Join Date
    May 2003
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    3,855
    Do a search on 1099 and you will see a whole lot of information.

    By discharging the debt and issuing a 1099, they are going to claim a LOSS of that $ on their taxes; you get that $ as INCOME since you won't be paying on that debt that they lost.

    You do need to keep the 1099 for future reference in case someone does try to come out of the woodwork to try collecting on the settlement balance (as well as the settlement letter, and the copy of your payment instrument).

    You can also be exempt from claiming 1099'ed debts as income if you are classified as insolvent.
    --
    jam
    An educated consumer.

    Daniel Webster: You seem to have an excellent acquaintance with the law, Sir.
    Scratch: Sir, that is no fault of mine. Where I come from, we have always gotten the pick of the Bar.
    The Devil and Daniel Webster, Stephen Vincent Benet

  3. #3
    Join Date
    Jan 2007
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    1,483
    While there is nothing wrong with what Jam has told you, some clarification might be helpful.

    The whole of the matter is to be found in the U.S. code at Title 26, section 2650-P or you can also call 1-800-IRS-1040 and ask them about it.

    The essence of it is that it has been a requirement that a 1099 must be filed for all debts that are charged off by creditors for several years now but there was no enforcement in place until 2006.

    Filing of a 1099 by the creditor does not excuse the debtor from his obligation to the debtor but it does allow IRS to collect income taxes on the charged off amount unless the debtor can prove that he is insolvent.

    Creditors who fail to file the 1099 with the IRS and mail a copy to the debtor can be subjected to fines ranging from $50 to $250,000

  4. #4
    Join Date
    May 2001
    Posts
    383
    Something dont sound right here.You have to claim uncollected debt as income but are not free of this uncollected debt.If the oc sells this uncollected debt they can only claim the difference between the charged off balance and the amount they sold it for right?Then the ca has to claim the amount they collected and claim that as income minus the amount they bought it for right?How can the debtor claim the uncollected debt as income when the debtor does not know if the debt will ever be uncollected?What if he claims the debt as income and then later on is sued for this debt and ends up paying this debt?It would be cheaper for the debtor to pay the tax on this debt rather than pay the balance owed if this debt can not be collected on once the debtor pays the tax..Also if the debtor must claim discharged debt as income he should also be allowed to deduct any interest or fees caused by this debt, since the charged off balance includes interest and fees.With any income created you are allowed to deduct any expenses you incured getting this income right?Oh what a tangled web we weave..

  5. #5
    Join Date
    Jan 2007
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    1,483
    You are making quite a few assumptions that I am not qualified to answer.

    I think you are bringing up some very valid points here. I don't see anything fair in the whole process but from what I understand IRS has never been known for it's propensity to be fair.

    In my opinion there are a lot of things wrong with the whole IRS plan.

    So I've already told all that I know about 2650-P. I'll just stand by and see what others have to say.

  6. #6
    Join Date
    Aug 2003
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    4,708
    It will be interesting to see how the IRS 2650-P regulations fare when combined with the proclivity of JDBs to dunn the wrong debtor.

    A federal court already rejected ACA's arguments that 2650-P could result in FDPCA violations by debt collectors, with the judge noting that debt collectors could always litigate the issue when they had a real case, and that sending a 1099C didn't necessarily mean the debt was owed, nor did it mean they even had to stop collection activities. The judge even rejected the argument that the debt collectors didn't have SSNs to use in sending in 1099C's, countering that they could just make sure that such identification was a requirement of all future debt purchases, and the problem would be solved.

    Yet the real issue is that debt collectors have long been routinely sending out dunning letters, and take other collection actions, on erroneous or bogus debts, and that they will now on top of that generate bogus 1099C's which the IRS and the alleged debtor get to argue over.

    The fallacy, by both the courts and the IRS, is the assumption that creditors, including JDBs, are usually credible and accurate, and that errors, whether deliberate or accidental, are rare. The high rate of errors on credit reports already indicates this assumption is false, as does the history of regulatory sanctions against certain debt collectors

    The debt collection industry has to date operated with little statistical visibility and oversight over their activities by regulatory agencies, with the exception of those who settled with FTC or state AGs and became subject to auditing requirements. In effect they get to hide their mistakes by distributing them among alleged debtors across multiple jurisdictions, and this has allowed them to operate with little accountability for sloppy and illegal collection practices. The worst also make use of multiple DBAs.

    The 2650-P regulations will now make erroneous debt collection visible by legally requiring reporting via 1099C's. This may cause a problem for those debt collectors who have eng