When OC's and (sometimes) CA's try to settle a debt with you, they advise that a 1099 is mandatory for the amount that was written off...which we all know is bs. at any rate, why do they even bother telling you this and doing it if you agree to it since they don't routinely issue 1099's on debts that are completely unpaid and written off? Somebody here is sure to know the answer to this.......I just can't figure it out myself..........hmmmm.
Well, you can't issue a 1099 to someone you're still potentially going to pursue for the amount (whether that potential is small or large). But they can issue a 1099 when you reach a compromise with them. And they get some tax advantage for doing it, so you can bet they want to do it. But the debtor needn't take it into income to the extent he/she was insolvent when the compromise was reached. That means you'd better account for it in your 1040, because the IRS's 1099/1040 matching system is really good, but you might not actually have to take it into income. I'm sure there's a form or schedule you have to attach to your 1040 when you claim that you can "include it out" (to paraphrase an old Hollywood mogul), but I'm not sure which it is.
It the debt is settled for less than full amount they can send you a 1099 for the difference since they will take a tax break by writing it off as a business loss. You don't pay social security on it but you do have tax liability since the government in essence has to allow a tax advantage to the grantor. I believe you have to use line 21 on the 1040 to put the 1099 amount on, but just ask you tax advisor if need be.
I understand the tax implications, but what I don't understand and maybe my original question was too vague: Balances are charged/written off every day and I am sure they take advantage of that as a tax write off. Why then don't they issue 1099's for the full amount once the TL becomes a charge off? Do they have to secure either a compromise settlement or a judgement before the IRS will let them take the deduct?
I think flacorps was trying to answer that question. While they may write it off, it is still in a status that they can try to collect against you. So they cannot send you a 1099 at that point. Even though they have written it off, they can still collect and bring it back on their books. Once they reach a compromise settlement with you, they will bring back as income to them the amount that they collect. The rest is written off permanently, possibly to another account. At that point, there is no possibility that they will collect the rest, and it therefore is forgiven debt, and considered income to you. So there are actually two stages to a write off.
Let me try to explain the income part of the equation. Suppose you borrowed 15k and paid it back. The only part that's really involved in taxes is the interest for the lender. (unless it's a mortgage, of course) Suppose you didn't pay that loan back, and it was written off. That's $15k of money you "earned" since you never paid it back. You may not actually have the money, but it's still income. I had this occur when I sold my home in '92 at a $150k loss. Had a lot of 'splaining to do on my tax return, but I was insolvent and it wasn't a problem.
thanks y'all for splainin this to me. i see now that it's all a matetr of accounting........is it half full or half empty depends on many things!!!!
The reason is simple - under the Internal Revenue Code (and Generally Accepted Accounting Practices) when person A forgives a debt owed by person B, B has realized income as if someone other than B had paid off the debt for B. What is NOT known by many people is that there are EXCEPTIONS to the taxability of forgiven debt, even if you recoeve a 1099C!!! The exceptions are: 1: Bankruptcy. If the debt is forgiven because of a Bankruptcy, the forgiven portion is NOT considered taxable income. This would most commonly happen when the OC was listed as creditor and recieved the BK Court notifications and a debt buyer actually owned the debt at the time. 2: Continued Insolvency. If, after the forgiveness of the debt, you are still insolvent (meaning you still owe more than you own) then the forgiveness of debt is not income. In that instance you should attach a balance sheet to your tax return showing the insolvency. 3. Disputed Debt. If the portion of the debt that is forgiven is disputed, then the cancellation of the debt is not income. Attach a statement to your tax return detailing the nature of the dispute.
thanks y'all for splainin this to me. i see now that it's all a matetr of accounting........is it half full or half empty depends on many things!!!!
Thanks flyingifr. I knew there were exceptions, but I don't do much in the way of taxes anymore, so I tend to not keep up with it like I used to. I didn't want to start giving out a lot of info and have it be wrong. Especially since tax law changes every time you turn around!
No, you have it all wrong. 3 people look at a glass. The glass holds 8 ounces of water, but only has 4 ounces of water in it. The optimist says the glass is half full. The pessimist says the glass is half empty. The accountant says the glass is twice as big as it should be, and who authorized the purchase of this oversized glass?
Re: Re: 1099 Question for those wiser ...AND GEORGE SAYS...WHO IN THEIR RIGHT MIND WOULD HAVE SUCH A SMALL GLASS OF PEPSI???
