If you’ve been to bankruptcy court recently, or are thinking of filing, you might be shocked out of your shoes when you receive a 1099-C from one of your creditors.
A what???
IRS form 1099-C is issued when there is cancellation of debt that might be considered income.
Now you really lost me, you say!
Whenever a loan is forgiven, accountants view this as a type of income to the “lucky” debtor. And wherever there is income, the IRS has a form for it. Enter Form 1099-C, stage left.
You are of course expected to add up your 1099’s and include this income on your return when you do your taxes. If you add in the forgiven income found on 1099-C, that will of course raise your tax (or lower your refund).
But there is a remedy, just as I promised. It’s IRS form 982, where you can explain that you don’t really owe this phantom tax because you filed a bankruptcy case. You just need to check box 1a on the form (talking about “discharge of indebtedness in a title 11 case).”
File that, and the problem should be averted.
You can get a form 982 right here.
By Doug Beaton