1099-C and Debt Settlement FAQs

(This is for educational purposes only and does not constitute tax advice. For information about your individual situation, please consult with a licensed tax professional.)

The purpose of this page is to answer frequently asked questions about IRS 1099-C. One will receive an IRS form 1099-C in the event that a creditor agreed to settle a debt for less than the balance owed and the debt was greater than $600. In the event that you settled a debt for less than the balance owed, the creditor is allowed to report the amount of the balance they compromised as a loss on their income statement. Since you never paid the full debt back, the IRS treats the amount you did not pay as income. For example, let’s assume you settled a $10,000 debt for $4,000. The IRS expects you to report the difference, or $6,000, on your income tax return for the year in which the settlement occurred, even though you never actually received the money.

What is an IRS 1099-C?

An IRS 1099-C is a form that notifies a taxpayer that the creditor intends to “write off” the remaining portion of the unpaid balance on their taxes for that year. It is filed by the creditor with the IRS when a settlement is reached or when a creditor has determined that a debt will never be paid. The purpose of the IRS 1099-C is to alert the taxpayer that they may be liable to report the forgiven portion of the balance on their taxes.

What if I haven’t received a 1099-C form?

For settled debts less than $600, you will not be liable to report the forgiven portion on your taxes. Otherwise creditors are responsible for sending you a 1099-C by the 31st of January before that year’s taxes are due. Creditors must send a 1099-C to the IRS by February of that tax year.

What should I do if I receive a 1099-C for a settled debt?

You need to report the forgiven portion of the balance as income on your tax returns. The amount shown in box 2 of the 1099-C is the portion you are expected to report as income. It is possible, however, that you are not liable to actually pay taxes on the settled debt.

When are taxpayers not liable to pay taxes on forgiven debts?

There are five situations when a taxpayer is not responsible for paying taxes on the forgiven balance:

1. When the debt was discharged through filing bankruptcy.
2. When the debtor was technically insolvent at the time of settlement. A debtor is considered insolvent when their debts exceed their assets.
3. When the debt was due to a qualified farm expense.
4. When the debt was due to certain real property business losses.
5. When the discharge of the debt was treated as a gift.

To learn whether you qualify for these circumstance, you may want to consult a licensed tax professional.

I was insolvent at the time of my debt settlement. What should I do?

If you were insolvent at the time of settlement, you will need to either fill out IRS form 982 or attaching a letter to your tax return that details your total debts and assets.