Hi All, My husband settled a credit card debt with Citibank in December, 2006. We fully expected to get a 1099C in January 2007 to file with our 2006 taxes for the settled amount. We received nothing. Yesterday he received the 1099C from Citibank with a settled date of September 21,2007 and the amount of the difference. My question is -If this was settled in 2006 how can they say it was settled in 2007 and do we have any course of appeal with Citibank or the IRS. I would think they would have had to get this to us in time for the 2006 tax return. Thanks!!
Have you got the canceled check? When did it clear your acount? If it cleared in '06 ... I think you could clip proof and an explanation to your 1040 to indicate that the '07 1099c is erroneous. Technically, you'd need to go back and file a 1040X and a 982 for '06 ... but just getting rid of an '07 1099c may be enough ... the IRS wouldnt be necessarily making you go back and do that 1040X unless and until the creditor issues a new 1099c for '06 (which they may not get around to doing, who knows). If the 982 would be availing to reduce the tax burden more in one year than another ... try to either let the situation alone or push the 1099c back.
Wouldn't the day they "realized" the gain be when the OC closes out the debt/account, not when the customer made the last payment? It seems to me that the OP could have paid in 2006 when they made the agreement which terminated the OP's obligation, but it's possible that the OC didn't close the account at that time and so the "income" from the difference would not have occurred in 2006. Then, sometime in 2007, the OC finally got around to balancing its books, closed the account and the OP realized the gain reported on the 1099. I'm just guessing, but if the 1099 says 2007, which is when it was reported to the IRS, it seems like it'd be much simpler to file it on the 2007 return. I'm just thinking out loud here...
When the creditor settles, the COD income is realized. In this case, the creditor apparently unreasonably delayed their own recognition of the settlement. The impact could be significant ... possibly no liability if it's recognized in 2006 and full liability if recognized in 2007. So it's time to do a couple of pro forma 982s and work out which way looks prettier. It wasn't the creditor's choice to make. But since they did what they did, it may give the debtor a choice, and I think the debtor should consult a tax professional and see which scenario is more advantageous to the debtor.
I can understand if it didn't make the books until say January 2007-however the date givein as the settled date is September 21, 2007-why 10 months later? I believe the best possible thing to do would be to consult a tax professional. Thanks to all for your input!!
I think you're right. I was leaning towards what ccbob was saying but, Flacorps makes some sound comments as well.
FLcorps is spot on. You will need to file a 1040X for 2006 not 2007. The determing date is the date you mailed your check, not when it was cashed. With the 1040X you will include a letter explaining the details behind the 1099C so that the IRS does not match it for the wrong year. There are a number of exception that you need to be aware of. Read publication 908 found here: www.irs.gov/pub/irs-pdf/p908.pdf You may not be liable for the realized income if you were insolvent at the time.
You may want to speak w/Citibank directly, and inquire as to why the delay. Did you make the final payment (to settle fully) in Dec '06?
Mailing date is the key legal determinant, but the date they cashed it (if in 2006) would be incontrovertible proof. And a procesing date resonably close to the first of the year in 2007 would clearly point toward receipt prior to close of business on the last day of 2006--it just wouldn't be as pretty.
My thinking is that Citi will not be on a cash basis for accounting purposes. And, if the OP was insolvent in 2006 and *not* in 2007, then there would be no reason for the 1040X. While being solvent in 2007, it may cause the OP to owe the IRS.
But all individuals are on the cash basis of accounting and on calendar-year fiscal years, and that's what I believe is going to govern this scenario. Being on accrual and perhaps using a fiscal year that doesn't correspond to the calendar year, Chase may have forgiven it in their 2007, but it was in the OP's 2006. And I think (without the benefit of doing any research, this is a priori reasoning) the OP's tax year would control here, since it's the OP that is going to be the one recognizing income by virtue of the COD that occurred when the settlement occurred. Chase got the bad debt writeoff years ago, for them the settlement is going to be recognized as income ... I wonder if they weren't trying to push it into a future tax year ... except that taxes on a big outfit like Chase are practically minute-by-minute. Assuming the 2006 settlement, I think that Chase just blew the date and is trying to fix it later ... again, this likely gives the OP the opportunity to pick the most favorable scenario.
Latest from IRS: http://www.irs.gov/newsroom/article/0,,id=177288,00.html Need for Better Taxpayer Guidance about Taxation of Canceled Debts The report finds that many taxpayers may be paying taxes they donâ??t owe because IRS instructions do not adequately explain exceptions to â??cancellation of indebtednessâ? income. If a taxpayer borrows money and the debt is canceled, the taxpayer generally must include the amount of debt cancellation in gross income. This rule received significant attention in 2007 as homeowners who could not make their mortgage payments lost their homes to foreclosure and stood to receive tax bills for any amount of debt that exceeded the value of their property. While Congress passed legislation granting temporary relief relating to mortgages, taxpayers received about two million Forms 1099-C reporting canceled debts last year, many relating to defaults on automobiles and credit card bills. There are several exceptions to the general rule that these amounts are taxable, including an exception that applies to the extent a taxpayer is insolvent (meaning the taxpayerâ??s liabilities exceed the taxpayerâ??s assets). In many if not most cases, the insolvency exception will shield canceled debts from gross income because affected taxpayers, almost by definition, are taxpayers who lack sufficient assets to cover their liabilities. However, IRS instructions do not explain the exceptions clearly. For example, the instructions to Form 1040 list canceled debts under the heading of â??Examples of income to reportâ? and make no mention of exceptions. As a consequence, many taxpayers who receive Forms 1099-C reporting canceled debts may include the amounts in income because they lack knowledge of the exceptions. â??This is a significant shortcoming that must be addressed,â? Olson said. The report recommends that the IRS improve its instructions and develop a publication devoted to canceled-debt issues.
