A 1099-c is used for cancellation of debt. IRS rules state that only banks can use 1099Cs and then only when they have written off their collection efforts. This means that they can't sell the debt to anybody else, and that they have to stop any collection efforts. 1099C's can only be used by banks and only when they forgive a debt. This means that the debt can't be sold for collection. If the above statement is true then if a bank sells a debt I will not be responsible for a 1099-c. For example: If a credit card debt is charged-off and then sold for collection and then I settled for less than the amount owed I will not receive a 1099-c and do not owe income taxes on this debt. Ex. credit card debt $20,000. Debt is charged-off. Next debt is sold. I then settle debt for $5000. I will not receive a 1099-c and do not owe taxes on the $15,000 difference.
A group representing JDB's recently sued the Treasury Department and the IRS to have a restraining order put in place to stop a policy of requiring them to issue 1099's in certain situations. The defendats motion to dismiss was granted. Complaint Opinion The complaint has some very interesting reading such as the fact that the JDB's admit they cannot validate a debt in most cases, as pointed out by Flyingifr at http://debtorboards.com/smf/index.php?topic=686.0
"In this case, an alternate legal remedy exists such that the South Carolina exception does not apply. Debt Buyers who have not yet obtained separate principal and interest information from originating lenders, as well as Debt Buyers who retain concerns (despite the lack of supporting legal evidence) that submitting 1099-C Forms will disinvest them of the ââ?¬Å?rightââ?¬Â to continue to pursue collection activities (see infra 20-21), can simply choose not to fill out and submit 1099-C Forms to the IRS. If Debt Buyers choose not to submit 1099-C Forms, they would not face the alleged risks of violating the FDCPA or allegedly undermine their ability to collect and enforce debts after thirty-six (36) months of no collection activity. If the IRS consequently chooses not to assess penalties for such non-compliance with Treas. Reg. Ã?§1.6050P-2(e), Debt Buyers will have suffered no harm, irreparable or otherwise, and thus would have no basis for injunctive relief. If the IRS actually pursues penalty assessment for such non-compliance with Treas. Reg. Ã?§ 1.6050P-2(e), Debt Buyers will have a legal forum in the form of penalty-refund litigation to raise the arguments it brings to the Court today and petition for relief from the actual harm of the penalty imposed."
It appears the Debt Buyers' remedies are to not submit 1099s, if they think FDCPA precludes that, and raise the issue as a defense if or when the IRS penalizes them, or to submit them, and claim in any FDCPA suit that the 1099s don't necessarily represent that the alleged debtor actually owes any taxes, but just that a "condition" requiring such reporting occurred. This also appears to mean that receiving a 1099 does not mean that the debtor actually has taxable income based on it. The debt collector can apparently also issue a 1099, and at the same time tell the alleged debtor they will continue collection activities, and that the debt is not discharged. But what about debts sold from buyer to buyer, any of which might have a reporting event (12 months with non-payment and no collection activity)? Do they all file 1099s? On the same debt? It does little to solve the problem of the large amount of zombie debt with erroneous or incomplete identification information. What does a debt buyer do with this? Submit a 1099, with what SSN? Get a SSN on some sucker who MIGHT be the debtor, and submit a 1099 on that? The judge thought this was only a temporary problem, since after 2005, the debt buyers could just make sure that they got the information on interest vs. principal before they bought a debt. The issue the Debt Buyers didn't appear to mention, was how this will ever resolve the huge portfolios of old debt floating from buyer to buyer, with incomplete or erroneous information attached, much of it inadequate to submit an accurate 1099. They might have been more truthful if they had said "We can't submit 1099s on our debt because we aren't really sure who owes it, we don't have reliable identification of the debtor, we are not sure if it is owed, or what is owed, but that never stopped us from collecting it anyway." Throw in a bunch of id theft cases, and we can have a real mess. But of course the courts will all be there, at least in theory, to sort it all out.
It would also appear that if you dispute a debt, and the JDB sends you a 1099 without validating, or that is erroneous, you should consider using that as the basis for an FDCPA action.
