Discharge of Indebtedness (DOI) Income and 1099-C Tax Forms
August 20, 2008
Many consumers filed for an extension in order to complete their 2007 income taxes because they needed more time to resolve discharge of indebtedness questions.
October 15 is fast approaching…and our office has received many discharge of indebtedness (DOI) questions.
Please see below for some of the most common questions we’ve received in the past few weeks.
What is “DOI income”?
Debt that is canceled, forgiven, or discharged is often called “discharge of indebtedness” (DOI) income. Consumers are sometimes taxed on DOI income.
Many debt collectors and creditors will send consumers a tax form 1099-C showing DOI income. Creditors send this tax form when they settle an account for less than the amount originally demanded.
I received a 1099-C tax form showing DOI income. Do I owe taxes?
A debt collector or creditor’s filing a form 1099-C does not automatically mean you owe taxes. There are several exceptions to the rule that discharge of indebtedness (DOI) income is taxable.
But, a creditor or debt collector is unlikely to research a particular consumer’s situation. It will generate the tax form and leave it to the consumer to prove to the IRS that an exception applies.
So, upon receiving a 1099-C tax form, the consumer and his or her attorney and / or tax professional must evaluate whether the consumer should be taxed on the DOI income or not.
If you should not be taxed, your attorney or tax professional can document your exception to the IRS.
There are many exceptions, but some of the most common are listed below. If you meet certain criteria, you should NOT be taxed on DOI income, even if you have received a tax form.
Even if you do not meet these criteria, other exceptions may apply. You should discuss your situation with an attorney or tax professional if you receive a 1099-C from a debt collector or creditor.
Common situations in which DOI income may not be taxable:
- The debt was discharged as part of a bankruptcy.
- The debt was discharged while the debtor was “insolvent.”
- The debt was disputed by the consumer.
- Forgiveness of interest and fees is often NOT taxable.
Tax Forms and Continued Collections
Once a debt collector has sent you a 1099-C tax form, it means it has forgiven or written off the debt. The debt collector should not continue to collect on the remainder of the debt.
If the debt collector (1) continues to try to collect on the remainder of your debt and / or (2) sells the remainder to another debt collector, it may have violated applicable federal and state laws.
Deliberate use of inaccurate tax forms as collection technique
Our office has heard several accounts of debt collectors’ continuing illegal collection activity through indirect means.
One such technique involves debt collectors’ filing inaccurate tax forms or threatening to file such forms.
If this has happened to you, contact an attorney.
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