Charged off debt and the tax man

uhh...are you serious? lets all not pay our debt and then get a refund on it for taxes...good grief...when the lender charges off the account it is not reported as income.

"The removal of an account from a credit card issuer's books as an asset after it has been delinquent for a period of time, usually 180 days. When an account is charged off, the credit card issuer absorbs the outstanding balance as a loss."

For those of you who don't speak "financialese" that means that a "charge off" or "write off" is really just an accounting entry. The lender is saying that they don't expect to collect the debt and are not willing to claim it as an asset of the company any longer.

 

The OP is referring to IRS requirements to send 1099s on forgiven debt, which might make part of the charged off amount (the principal) taxable income to the consumer.

Recent changes in IRS regulations have apparently required CAs to send such 1099s on accounts over certain amounts. This may create a mess for the taxpayer if the alleged debt is erroneous, or as the OP states above, it is later paid after being reported as "taxable income". The court decision (involving Debt Buyers Association (DBA), a trade group, which was basically seeking clearer regulations) centered on DBA's concern that CAs would be sending out 1099s and that they might run afoul of FDCPA for debts that were disputed and for which no validation had been sent.

They also claimed they didn't have the required information to send accurate 1099s, since they might not have enough identity information, including SSN, and principal and interest must be reported separately so that the taxpayer would only pay taxes on the principal. The judge provided little clarification, basically dumping the problem back on the CAs, telling them they could just require that information with any portfolios they bought in the future, and if they had a problem, they could litigate when a real case came up.

FDCPA requires that when a consumer disputes a debt, all parties notified of the debt also be notified that the debt is disputed. It also prohibits notifying anyone of debt information that the debt collector knows to be erroneous. In addition, once validation has been requested timely, the debt collector must suspend collection activities, and may not consider the debt valid until validation has been obtained from the original creditor and sent to the consumer.

A problem for the CAs is that they might be subject to IRS penalties for sending erroneous 1099s, or for sending 1099s without SSNs.

The more obvious problem to educated consumers is that a lot of old resold debt may be entirely erroneous, or the correct debtor might not be identified. This may result in CAs sending in erroneous 1099s on "debts" in dispute, never validated, and possibly not even owed, dumping their headache onto the consumer, who then gets to either pay taxes on a debt they may not owe, or incurr the costs of dealing with the IRS.

What happens when debts are transferred from CA to CA? Does each CA send in a 1099 when they make their accounting decision the debt is uncollectable? How many 1099s will old OOS debt generate on what is really the same principal being written off? Indeed, except for the OC, the CAs won't even be writing off the original principal, but instead whatever their purchase cost is, yet this amount has no relationship to the report information on the consumer's 1099.

The DBA apparently never brought up the issue that their industry routinely collects on debts erroneously, sometimes from the wrong consumer, sometimes refuses to validate or deceives the consumer into thinking they have no right to validation, sends fabricated validation, and engages in other illegal acts.

It may be that the judge was ridiculously naive, or maybe his decision hinged simply on the fact that there was no actual "case" to decide on. Or maybe he was simply throwing the debt collection industry's problems, which are largely of their own making, back at them.

Maybe when a consumer gets an erroneous 1099, and disputes the 1099 thru the IRS, the CA can then litigate their penalty in court, with the defense that since they made up the validation, they had to assume the debt was valid and send a 1099.

 

While ONTRACK has provided the most accurate information, some clarification might be in order.

According to 26 U.S.C. 2650-P 3rd party debt collectors may not report via 1099
unless they know conclusively that the original creditor has not done so. This is to prevent multiple filings on the same debt.

The 1099 must separately list the principal amount of money actually loaned separately from all other interest, fees and other charges.

The debtor must be provided with an exact copy of the 1099 filing. There is nothing recent in these rulings. 26 USC 2650-P has been in effect for several years but has not been enforced by IRS. The enforcement phase was first started January 1, 2005 at which time the IRS gave all concerned entities until January 1, 2006 to come into full compliance with the law. If they failed to do so the penalty phase calling for fines of up to $250,000 can be levied against creditors or others who are not in compliance. The minimum fine is $50.00.

What amount of fine will be levied, if any, will be determined by IRS.

Debtors have the right and maybe the responsibility to report violators to the IRS by phone at 1-800-IRS-1040 and I suggest that the more calls IRS gets about known violations the better. A few $250,000 fines should improve the bottom lines of junk and junky debt collectors considerably.

At least from our standpoint.

 

Thanks for the clarification.

I was looking for that information on the ACA site, but they appear to have reorganized it, and it may now be in the member only section.

When the judge's decision came out about a year ago, it's full text was somewhere on the web.

 

I seriously doubt that the American Criminals Association wants their members exposed to such fines. A $250,000 fine might mean the debt collector wouldn't be able to meet his membership dues to ACA. That would not be desireable from their viewpoint.

Yes, it is on the web. There is also an audio recording of a conversation with the IRS available in which much of this is clarified.

As usual few are in compliance.

 

Correction: I was mistaken. It does not appear this was by ACA Intl.
Instead, suit was filed by Debt Buyers Association, a trade group.
(And so, I will correct the above comments.)

Here is a link to discussion on this site:
http://consumers.creditnet.com/Discussions/credit-talk/t-understanding-1099cs-63689.html/