irs tax form 1099 and uncollected debt - Credit Repair Forum from Creditnet
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  1. #1
    peeper is offline Senior Member
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    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?

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  3. #2
    jam237 is offline Senior Member
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    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

  4. #3
    cap1sucks is offline Senior Member
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    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

  5. #4
    peeper is offline Senior Member
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    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..

  6. #5
    cap1sucks is offline Senior Member
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    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.

  7. #6
    ontrack is offline Senior Member
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    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 engaged in collection of disputed debts they should have known were erroneous, as the errors may start to become visible in the taxpayer dispute statistics associated with each source.

    The IRS has generally been able to operate on the assumption that most data reported on taxpayers is accurate, and for reporting tied to taxpayer actions, such as reporting of wage income, interest income, stock trading, retirement account, and mortgage payment data, this is probably correct. In the past they have sanctioned people who out of malice sent in fraudulent 1099C's to harass others, and they have recently had to deal with an increase in erroneously reported income due to theft of identity by illegal immigrants.


    The reality is that some portion of allegedly unpaid debts is actually due to errors on the part of the original creditor or later debt collectors, possibly due to uncorrected billing errors, misidentification, or outright fraud, and that state SOL and limits on credit reporting have acted as a check on the extra-legal collection tactics of the debt collection industry in collecting on such questionable "debts".

  8. #7
    cap1sucks is offline Senior Member
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    Quote Originally Posted by ontrack View Post
    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.
    Mind you that when I'm talking about anything to do with IRS I'm in way over my head so please take it easy on me if I happen to be wrong about something about this topic. :)

    I think what you said may very well be a classic example of what happens if you ask a judge the wrong question Here is why I say that.

    ACA should not have asked a judge about 2650-P and combine FDCPA in their question. The question probably should have been asked of a tax court judge and should not have even mentioned FDCPA.

    IRS has already stated that a debt collector may not file a 1099 unless they know for a fact that the original creditor has not done so. The reason is that if both filed then it would appear that the taxpayer owed the IRS on two different debts and end up owing double the taxes.

    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.
    That may be another reason that IRS don't want debt collectors filing 1099 forms.
    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.
    Very true
    The debt collection industry has to date operated with little statistical 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. 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 engaged in collection of disputed debts they should have known were erroneous, as the errors may start to become visible in the taxpayer dispute statistics associated with each source. The IRS has in the past sanctioned people who out of malice sent in fraudulent 1099C's to harass others.
    Interesting. I wasn't aware of that.

    The reality is that some portion of allegedly unpaid debts is actually due to errors on the part of the original creditor or later debt collectors, possibly due to uncorrected billing errors, misidentification, or outright fraud, and that state SOL and limits on credit reporting have acted as a check on the extra-legal collection tactics of the debt collection industry in collecting on such questionable "debts".
    There is more to it than that. IRS specifically states that the 1099 must reveal only that part of the alleged debt that constitutes the principal and all interest, fees and penalties must be listed separately from the principal as IRS does not want to charge taxes on interest, fees or penalties of any kind.

    Now just how is a JDB or 3rd party debt collector going to comply with that?
    Also, 1099 may not be filed if the debt has been disputed by the taxpayer.
    Now tell me just how valuable a demand for validation becomes? :)

  9. #8
    ontrack is offline Senior Member
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    ACA may have been in a bind in this case as it appears they were trying to give their members some leeway in compliance with 2650-P knowing that it was common industry practice to sell old debt repeatedly with only partial information, and that many such debts were suspect both as to the correct debtor, and as to the amount owed, hence the FDCPA validation requirements.

    To be fully honest in their arguments, they would probably have had to say "Our members really haven't a clue whether anyone owes the debts we are trying to collect on, but we routinely assume they are owed.", something they would probably not want to admit publicly. They appeared to sugar-coat their lack of reliable account information, and the judge just told them they could simply ask for it the next time they buy debt, so what's the problem?

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