How-TO: I Got a 1099-C I Disagree With -- How Do I Dispute It?

[philly_mscl]

This question has been asked several times. I've disputed 1099-Rs and 1099-INTs before. Disputing the figured shown on a 1099-C with the IRS is no different.

 

As a backgrounder, I have worked at HRB for 5 years in the past. The procedure for disputing any 1099 form is the same. Disputing a W-2 is different [because you have some data to make educated guesses with].

 

 

Why/when should dispute a 1099-C?

- You received a 1099-C from a CA/JDB who paid pennies on the dollar for the debt, AND...

- The debt as traded hands numerous times, AND...

- The debt is out of SOL.

 

 

The IRS window for looking into the past is FIVE YEARS, with the option of going back in time TWO ADDITIONAL YEARS. This practice has been in place since the 1970s. So if you are getting a 1099-C for a forgiven debt that defaulted way back in the 1990s... THE JDB HAS NO BASIS TO ISSUE A 1099-C.

 

 

 

What is a 1099-C?

 

A 1099-C is a reporting of debt forgiveness by a lender to the borrower. This is primarily intended for large debts, such as car loans, houses, very large credit card balances, etc. If you work out a deal with the original creditor to settle the balance of the debt, in essence what you received was a taxable gift.

 

When you borrow money, the IRS does not tax you when you do this transaction. That is because you have the obligation to return the funds at some point in the future and the interest you pay is taxable to the lender as income.

 

 

When does the 1099-C become obsolete?

 

An obsolete debt is one that has no legal basis for collections. IOW, the debt is out of the statute of limitations for collections--so the lender has no remedy to come after you for the money. Are you released from the obligation? Well, yes and no.... the OC still has rights to attempt collections within the limits of FCRA/FDCPA, but the 1099-C issuance is moot, especially since by now the OC has already taken the charge off for this debt.

 

 

Now from the JUNK DEBT BUYER's prospective... they did not "forgive" you anything. When the OC sold the debt, they basically gave up their rights to pursue the debt from you. The debt purchaser did not inherit the original contract protections, commitments and obligations between you and the original creditor.

 

The only thing the Junk Debt Buyer purchased was a fiscal instrument.... a junk debt contract. If the debt is SOL--the JDB doesn't have any legal recourse, especially if nobody bothered to attempt a default judgment on you.

 

 

What are the RISKS?

 

The risk is that the IRS will simply obviate your dispute on the petition and simply change Line 21 back to the figure shown on the 1099-C and recalculate your AGI which resets your tax calculation.

 

 

If you want to know what the pain will be---then do your return with and without the figure in Line 21 so you can see the difference in outcome. Set that amount of money aside in your EMERGENCY SAVINGS ACCOUNT you should already have (didn't you listen to Suze Orman? ) so that way if the dispute fails to fall on sympathetic ears on the IRS, you will be protected.

 

 

DISPUTE THAT 1099!!!

 

This is the process if the 1099 was issued by a Junk Debt Buyer or a CA who paid for the debt for a fee:

 

 

1. File on paper. You have to b/c you're going to:

 

2. Attach an attestation statement. On Line 21 of the Form 1040 for 2008, write the CA's name, the amount and then write SEE ATTESTATION STATEMENT.

 

3. For the amount of the 1099 on Line 21, enter 0

 

3. The TOP of the attestation statement needs to have on the top of the page the name as shown on Page 1 of the 1040, and on the right hand side at the top, the primary SSN number. This is VERY IMPORTANT. When paper returns hit the IRS, all the pages in your return are separated at what are called "tingle tables" because different data entry departments process each page of the tax return.

 

--> MR. JOHN CONSUMER & MRS. JANE CONSUMER 000-000-0000 <--

 

 

4. Explain the situation in the attestation statement. Explain that your payment was for far more than what the original purchaser of the debt paid to acquire the debt. Explain that the Original Creditor, list name, address and phone number, had discharged this debt (write-off). You can attach a page of a copy of the credit report showing that the debt is indeed an discharged debt and it's owned by the CA, not the OC. Sample text:

 

 

ON NOV 18 2008 I WAS CONTACTED BY ASSET ACCEPTANCE CORP FOR A DEBT OWING IN THE AMOUNT OF $2,000.00 I HAVE NEVER PREVIOUSLY DONE BUSINESS WITH ASSET ACCEPTANCE CORP, NOR HAVE I EVER INCURRED A DEBT AT ASSET ACCEPTANCE CORP.

 

ASSET ACCEPTANCE CORP IS A DEBT ACQUIRER AND COLLECTIONS AGENCY. THE ORIGINAL DEBT WAS OWNED BY {CREDITOR NAME} AND DISCHARGED ON OR ABOUT MAY OF 2008.

 

 

ASSET ACCEPTANCE PURCHASED THIS DEBT FOR AN AMOUNT LESS THAN THE AMOUNT ASSET CLAIMED I OWED THEM. ASSET ACCEPTANCE REFUSES TO DISCLOSE THE AMOUNT THEY PAID FOR THIS DEBT.

 

 

THE ORIGINAL CREDITOR, {CREDITOR NAME} DISCHARGES THIS DEBT.

 

ASSET ACCEPTANCE, THEREFORE, EARNED A PROFIT FROM THIS COLLECTIONS ACTION AFTER I AGREED TO PAY THEM TO RESOLVE THIS CASE.

 

 

 

I ASSUME THE ORIGINAL CREDITOR HAS EXPENSED THIS BAD DEBT ON THEIR CORPORATE INCOME TAX RETURN.

 

IT IS BEST TO ASSUME THAT ASSET ACCEPTANCE MAY NOT HAVE APPROPRIATELY ACCOUNTED FOR THIS DEBT ACTION.

 

 

I AM REPORTING THIS 1099 FROM ASSET ACCEPTANCE IN THE AMOUNT OF $0.

 

 

 

5. Do everything on your tax return as normal.

 

6. Mail the tax return off to your assigned IRS Service Center, CMRRR (Certified Mail, Return Receipt Requested).

 

 

 

 

The IRS should automatically process your return within 5 business days after the paper return hits their mail center, and if you have a refund coming, it will process 7-12 business days after that.

 

 

 

Call 1-800-829-1040 if you have any problems.

[radi8]

Something else to consider:

 

IRS regulations require that the 1099 "stated principle" box 2 amount contain canceled principal, not interest, unless the amount of interest included is also listed separately in box 3.

 

Most junk debt buyers have no idea what portion of the debt is principal and what portion is interest, fees and charges. None. They lump the whole mess into box 2 and leave box 3 blank, which violates IRS regulations.

 

You may do well to insist (CMRRR) the JDB provide a clear accounting of the "stated principle" they claim was canceled- detailing any interest/fee/other charges that are required to be reported separately. These figures will need to be traceable to the OC.

Give them 30 days or less- after all, if they've filed the 1099 they must already have that information handy, right?

On day 31 when they've ignored you, report them to the IRS' compliance division.

[UncleRico]

Now that makes sense... Thank You!

[philly_mscl]

Not only that, but if the JDB is reporting to the IRS that they forgave a principal balance 99% of the cost basis is not generated off the JDB's books,

 

There is a probability that the Junk Debt Buyer might also be misreporting their own income to the IRS.

 

 

For example, if they are claiming they forgave you $2,000 it might be the case that thay are also reporting to the IRS that they've taken a portion of that $2,000 and put that towards a bad debt expense. Collection agencies have to be very careful about what they expense.

 

- The depreciation of assets required for use of the business (VOIP charges, autodialing equipment, software, CRA fees)

- Payroll

- Origination cost <-- If they paid $1.00 to acquire $100.00

 

 

 

 

The entity who issued you the 1099-C is important. If the 1099-C is coming from an original creditor or an inside hired collections agency, then this debt forgiveness is genuine and you need to take steps to make sure that the 1099-C is correct. If it is incorrect, you need to have justification for what the amounts should be and you need to adjust their 1099 and again, file a paper tax return and attach that attestation statement explaining why you adjusted their forms and failed to get a corrected 1099 if your attempts to get a correct form fail with the OC/CA.

 

 

 

If this 1099 is coming from a Junk Debt Buyer for an out of statute debt, the JDB has no basis for sending you a 1099 and if the debt is really ancient--more than 7 years old--even more reason to just zero out the 1099 and complain to the IRS about it in hopes that it will start an investigation by the IRS.

 

 

 

FYI, the department at the IRS that deals with fraud is the CID - Criminal Investigation Division unit. They are brought in whenever complaince problems are discovered in a routine audit.

 

A side note: Don't threaten the JDB and/or tell them anything about what you are doing on your income tax return. First, they won't care about your idle threats and they will just think you're another loony deadbeat to them, and second---it is better if the JDB is caught off guard when they receive a letter from the IRS requesting a mail-in audit of their own partnership or corporate tax return.

 

 

Again, the IRS is really helpful in these situations. 1-800-829-1040 is the number you need to call if you need to speak with them and discuss your situation. The employees who answer there can connect you to any department within the IRS to get a matter resolved quickly.

 

 

 

Something else to consider:

 

IRS regulations require that the 1099 "stated principle" box 2 amount contain canceled principal, not interest, unless the amount of interest included is also listed separately in box 3.

 

Most junk debt buyers have no idea what portion of the debt is principal and what portion is interest, fees and charges. None. They lump the whole mess into box 2 and leave box 3 blank, which violates IRS regulations.

 

You may do well to insist (CMRRR) the JDB provide a clear accounting of the "stated principle" they claim was canceled- detailing any interest/fee/other charges that are required to be reported separately. These figures will need to be traceable to the OC.

Give them 30 days or less- after all, if they've filed the 1099 they must already have that information handy, right?

On day 31 when they've ignored you, report them to the IRS' compliance division.

[Jen23514]

wonderful info.... adding to my profile for easy reference!

[gdtobefree]

EX DH got one from a foreclosure that was from the OC Citimortgage he has to claim it on his taxes BUT it doesn't count against him because he filed Chap 7 on Citimortgage.

 

I called the IRS and asked then filed his taxes and his refund didn't change nor did his AGI.

 

So just a warning, if you do get a LARGE 1099 and did file BK you should be in the clear on your taxes

[philly_mscl]

EX DH got one from a foreclosure that was from the OC Citimortgage he has to claim it on his taxes BUT it doesn't count against him because he filed Chap 7 on Citimortgage.

 

I called the IRS and asked then filed his taxes and his refund didn't change nor did his AGI.

 

So just a warning, if you do get a LARGE 1099 and did file BK you should be in the clear on your taxes

 

 

One thing you need to seriously watch out for is if the 1099 issuer tacked on late payment fees and other such nonesense into the 1099 and didn't report the true balance (the PRINCIPAL) of the disbursement you received.

 

 

You don't pay income tax on interest EXPENSE. The creditor pays taxes on intrest income. If the debt went south, the creditor writes this amount off their corporate return.

 

You do NOT PAY INCOME TAX on balances which are NOT PRINCIPAL and are not monies that you were destributed to you in the terms of the original agreement.

 

 

 

 

Let me explain this so it is easy to understand:

 

 

 

1. Creditor X gives extends you a revolving signature credit Line: $100,000.00

 

2. You take out $25,000.00

 

3. At some point in the future, relationship goes south. At the time of the default, the remaining balance is $6,000.00 default is 4 months old.

 

4. Account goes to internal collections. Late fees and surcharges added to account, $196.50 default is 8 months old.

 

5. Account goes to external collector. Late fees and surcharges added to account, $516.00 default is 25 months old.

 

6. Account goes to secondary/tertiary debt market. Balance is now showing $7,915.54 [as is the case, somewhere along the line the fees/surcharges don't jive as the account bounces around the system] default is 61 months old

 

7. You agree to partial payoff to JDB for the amount of $2,000.00

 

 

8. JUNK DEBT COLLECTOR SENDS YOU A 1099-C in the amount of $5,915.54

 

 

 

 

This amount is wrong on so many levels. First of all:

 

1. Original creditor charged off the debt as a business expense. The covenant still exists between you and the OC.

 

2. Assigning the debt for recovery does not change the legal contract between you and the OC. The OC did NOT forgive you the debt, even if you do send the CA a check for $100 and CA agrees on the phone that will be enough to make them stop collections. The OC still considers you on the hook for the balance even PAST charge-off. If they assign the debt anyway, then if you get a 1099-C you should dispute it with the IRS; no ifs or butts.

 

3. Once the debt is sold into the JDB markets, the JDB did not enter a debt obligation with you. They purchased a debt-security, a defaulted debt contract, and they're attempting to make some bucks off of it. Even if you partially pay this JDB, that does not stop the JDB from selling off the remaining balance to someone else UNLESS THEY AGREE IN WRITING THAT THE DEBT IS FULLY DISCHARGED AND THE REMAINING MONIES OWING ON THE ACCOUNT ARE FOREVER EXPUNGED. If the JDB just wants a check from you and all they do is stop contacting you, that gives you no assurance that the remaining money owed on the account is not going to be subject to further collection.

 

Therefore, unless there is an agreement (WRITTEN, not oral) attached on your payment advice slip that this debt is truly discharged forever---you consider yourself still on the hook for the rest. Therefore the 1099-C is not worth the paper it is printed on. Make sure the IRS understands this when you talk to them.

 

4. And above all, the most important thing---VERIFY that amount. Is any part of the taxable amount showing in BOX 2 including the following?

 

- Late charges

- Surcharges

- Accellerated interest

- Court costs

 

 

If SO, that is NOT DEBT---those are FEES and those are NOT YOUR TAXABLE INCOME... those amounts are REVENUE/PROFIT to the collectors and they should be reporting that as either revenue or as taxable expenses on their own returns, it has no business being on YOUR income tax return.

 

If the amount is wrong, write down the amount to the principal amount of the actual debt (estimate if you have to), and then ATTACH AN ATTESTATION STATEMENT TO THAT TAX RETURN.

 

 

 

 

 

Hopefully this thread answers every question out there about 1099-Cs

[Sketch]

THANK YOU for the valuable information you provided in your thread on 1099Cs--it is is quite remarkable. I have researched this topic in depth the past few days since receiving a surprise 1099C from Portfolio Recover Associates.

I was resigned to reporting the almost $5000 amount as income on my taxes because of the conflicting advise on the Internet. But this thread is making me think otherwise.

The debt is from 1999 on an auto loan that I defaulted on, returning the car but owning something still. I have copies of my credit report from 2003 that states the OC charged off the debt. It seems that this is one of the situations that you said qualifies to add a statement to my taxes and change the 1099C to ZERO.

Does this sound like such a situation?

And if so could I file such a return with Turbo Tax and print it out or would I have to do it longhand?

I appreciate you taking your time and expertese in helping those of us who read conflicting advice on the Internet. By the time I read the top 100 google links on this topic I didn't know what to think.

[DragonFlyer]

Quick question:

 

OC accepts settlement on a debt. They charged it off just a month prior to the settlement. Settlement was paid by the debtor without knowing the account had already been charged off.

 

Under those circumstances, can the OC still report a 1099-C to the IRS? What if you never got a copy to see what was reported and found out by an offset two years later?

[DragonFlyer]

Friendly bump

[EarnIt]

Quick question:

 

OC accepts settlement on a debt. They charged it off just a month prior to the settlement. Settlement was paid by the debtor without knowing the account had already been charged off.

 

Under those circumstances, can the OC still report a 1099-C to the IRS? What if you never got a copy to see what was reported and found out by an offset two years later?

 

They can 1099-c you. Claiming insolvency is a handy way to work around the issue. The offset two years later, would upset me. You may have to amend your original return to document insolvency (assuming you were).

Edited March 5, 2009 by EarnIt

[mk_378]

Check this first, before getting real technical. If the taxpayer meets the IRS insolvency test, forgiven debts listed on a 1099C are not taxable, and you can stop right there.

 

Most people are technically insolvent (more debts than assets). Also you get to include the forgiven debt as a debt in the insolvency computation. So the bigger that number on the 1099C, the better.

 

Edit: and EarnIt beat me to it.

Edited March 5, 2009 by mk_378

[DragonFlyer]

That makes sense on how you explained it because I see where this is going...but then I am confused. LOL

 

First I just need to get a copy of the 1099C just to see what was reported. I only know that our 2008 return was offset to cover the unreported income plus interest and penalties. The IRS agent said we failed to report a 1099C from a previous lender in 2005 or perhaps 2006. It SHOULD be 2005, but I can't be sure until I see a copy of the 1099.

 

I read this on the IRS site about insolvency and got a look on my face that resembled this guy---->

 

http://www.irs.gov/publications/p4681/ch01.html#d0e665

 

I feel stupid. I have never heard of insolvency before. I don't really fully understand how to determine our assets vs. debt to see if there is insolvency in the first place. How do we find out asset values in 2005 or 2006? Then, once we find out if we are insolvent...how do we report it? Does it matter if the 1099-C was issued to one person on a joint return ...as in... do you determine the insolvency test ONLY for the person the debt or for both taxpayers on the return? For instance, we both have student loans and those are calculated in the insolvency test, but do we only calculate the SL debt for the person the 1099C was issued to?

 

help? Muwah...if what you guys are explaining applies to us, I am going to be SOOO happy to amend our taxes.

[roadrage]

Check this first, before getting real technical. If the taxpayer meets the IRS insolvency test, forgiven debts listed on a 1099C are not taxable, and you can stop right there.

 

Most people are technically insolvent (more debts than assets). Also you get to include the forgiven debt as a debt in the insolvency computation. So the bigger that number on the 1099C, the better.

 

Edit: and EarnIt beat me to it.

 

I am confused about this statement, as I have seen it repeated on several website forums discussing the 1099-C. It just seems odd that...what was once a debt, turned into income because of the issuance of a 1099-C, but is now a debt again when determining insolvency. Anyone had this confirmed by the IRS, accountant, etc?

 

Another thing I am curious about is this. It seems most 1099-C's issued by OC's are issued to those who entered into some sort of settlement procedure; i.e. settled for less than full amount and the amount on the 1099-C was the forgiven remainder. What if you never paid anything to the OC or it's CA's during the period between default and the 1099-C? In my case, I got a 1099-C from an credit card company for the tax year 2008. There were no payments made whatsoever after default, and the total balance listed on the 1099-C is pretty close to the final amount due at default, which includes not only principal but interest, charges, fees, etc... Not only that, but they are still reporting this amount on my credit reports (which has shown "disputed" for a few years) and their CA is still calling me day in and day out. Seems they are still trying to collect. This debt is OOS by about a year.

Edited March 6, 2009 by roadrage

[EarnIt]

Check this first, before getting real technical. If the taxpayer meets the IRS insolvency test, forgiven debts listed on a 1099C are not taxable, and you can stop right there.

 

Most people are technically insolvent (more debts than assets). Also you get to include the forgiven debt as a debt in the insolvency computation. So the bigger that number on the 1099C, the better.

 

Edit: and EarnIt beat me to it.

 

I am confused about this statement, as I have seen it repeated on several website forums discussing the 1099-C. It just seems odd that...what was once a debt, turned into income because of the issuance of a 1099-C, but is now a debt again when determining insolvency.

 

Another thing I am curious about is this. It seems most 1099-C's issued by OC's are issued to those who entered into some sort of settlement procedure; i.e. settled for less than full amount and the amount on the 1099-C was the forgiven remainder. What if you never paid anything to the OC or it's CA's during the period leading up to the 1099-C. In my case, I got a 1099-C from an credit card company for the year 2008 where there were no payments made whatsoever after default, and the total balance listed on the 1099-C coincides with the final charge-off amount which would include not only principal but interest, charges, fees, etc... Not only that, but they are still reporting the full amount on my credit reports (which has shown "disputed" for a few years) and their CA is still calling me day in and day out. This debt is OOS by about a year.

 

Insolvency is determined based on your financial situation just prior to forgiveness of the debt.

 

As to your other question, there are rules regarding when a 1099-c has to be issued on unpaid debt. There was another thread that discussed this in depth awhile back. 36 months seems to come to mind but I am not certain. If the debt was forgiven then in my opinion the OC is reporting incorrectly.

[roadrage]

Check this first, before getting real technical. If the taxpayer meets the IRS insolvency test, forgiven debts listed on a 1099C are not taxable, and you can stop right there.

 

Most people are technically insolvent (more debts than assets). Also you get to include the forgiven debt as a debt in the insolvency computation. So the bigger that number on the 1099C, the better.

 

Edit: and EarnIt beat me to it.

 

I am confused about this statement, as I have seen it repeated on several website forums discussing the 1099-C. It just seems odd that...what was once a debt, turned into income because of the issuance of a 1099-C, but is now a debt again when determining insolvency.

 

Another thing I am curious about is this. It seems most 1099-C's issued by OC's are issued to those who entered into some sort of settlement procedure; i.e. settled for less than full amount and the amount on the 1099-C was the forgiven remainder. What if you never paid anything to the OC or it's CA's during the period leading up to the 1099-C. In my case, I got a 1099-C from an credit card company for the year 2008 where there were no payments made whatsoever after default, and the total balance listed on the 1099-C coincides with the final charge-off amount which would include not only principal but interest, charges, fees, etc... Not only that, but they are still reporting the full amount on my credit reports (which has shown "disputed" for a few years) and their CA is still calling me day in and day out. This debt is OOS by about a year.

 

Insolvency is determined based on your financial situation just prior to forgiveness of the debt.

 

As to your other question, there are rules regarding when a 1099-c has to be issued on unpaid debt. There was another thread that discussed this in depth awhile back. 36 months seems to come to mind but I am not certain. If the debt was forgiven then in my opinion the OC is reporting incorrectly.

 

Thanks for the response. And i agree, I think they are reporting incorrectly too. Not to mention the CA collecting they hired long ago started calling againrecently. The debt is SOL by a year.

 

I thought the 1099-C was issued only for the principal and that any other amount included on top of that had to also be distinguished in a separate box so that one could easily separate out the principal for tax purposes.

Edited March 6, 2009 by roadrage

[EarnIt]

Thanks for the response. And i agree, I think they are reporting incorrectly too. Not to mention the CA collecting they hired long ago started calling againrecently. The debt is SOL by a year.

 

The debt is SOL and you have a 1099 forgiving the debt. I would tell the CA to pound sand. If they report, I would consider finding a lawyer and suing the $%%%^@$ out of them. How can a CA collect let alone report on a forgiven debt?

Edited March 6, 2009 by EarnIt

[roadrage]

Thanks for the response. And i agree, I think they are reporting incorrectly too. Not to mention the CA collecting they hired long ago started calling againrecently. The debt is SOL by a year.

 

The debt is SOL and you have a 1099 forgiving the debt. I would tell the CA to pound sand. If they report, I would consider finding a lawyer and suing the $%%%^@$ out of them. How can a CA collect let alone report on a forgiven debt?

 

It isn't the CA that is reporting, it is the OC that is still reporting it as they normally do when an account becomes late, default, etc. As for the CA, I will wind up the trusty old voice recorder and see if I can get them to hang themselves.

[kks2003]

I have taken all this time trying to correct my report and my score has increased tremendously. Then today I get a call AT MY JOB telling me to return. Behold it was an old Discover card account. Last time I used the card was in 2001 or 2002 and the agency that called me clearly stated that it was charged off in April of 2003. They tried to settle for $962 (real balance) but said that they were about to submit a 1099 c for $4580, and of course that is with interest and no telling what other fees. I was excited that it fell off my report but I had no idea that I would have to worry about the IRS with such a small amounth. The word IRS just gives me the creeps..lol.. Now down to my question. I have read this post and no one mentions anything about judgement or liens or such. The representative told me that that could happen. I have spent too much time improving my report for this to happen. My question is can that happen? This is not even the OC. I'm in GA and I thought the SOL was up already. And when I was reading it looks like the OC should have already submitted the 1099c when the charged it off originally? Could this be the CA just trying to get a penny off of this debt that they bought? Please advise. I'm not liking the sound of a judgement or lien going on my report.

[EarnIt]

I have taken all this time trying to correct my report and my score has increased tremendously. Then today I get a call AT MY JOB telling me to return. Behold it was an old Discover card account. Last time I used the card was in 2001 or 2002 and the agency that called me clearly stated that it was charged off in April of 2003. They tried to settle for $962 (real balance) but said that they were about to submit a 1099 c for $4580, and of course that is with interest and no telling what other fees. I was excited that it fell off my report but I had no idea that I would have to worry about the IRS with such a small amounth. The word IRS just gives me the creeps..lol.. Now down to my question. I have read this post and no one mentions anything about judgement or liens or such. The representative told me that that could happen. I have spent too much time improving my report for this to happen. My question is can that happen? This is not even the OC. I'm in GA and I thought the SOL was up already. And when I was reading it looks like the OC should have already submitted the 1099c when the charged it off originally? Could this be the CA just trying to get a penny off of this debt that they bought? Please advise. I'm not liking the sound of a judgement or lien going on my report.

 

You may want to start your own thread for this question. It will get more answers.

[kks2003]

Thanks EarnIt. I'll definitely do that!