Can a 1099 Form Be Filed for Non Payment of Credit Card Debt?
An Internal Revenue Service Form 1099 is used in conjunction with your tax return to report any income received from resources other than employee wages or salary. The 1099 form is commonly used to report income received from dividends or interest from investments and bank accounts, or to report income received for performing freelance work as an independent contractor. In some situations, a 1099 form may be filed for non-payment of credit card debt.
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Types
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The 1099 forms have various purposes, but all are used to report income on which the IRS can collect taxes. Two common types are the 1099-DIV and 1099-INT for reporting investment dividends and interest earned on savings, CDs and other types of bank accounts. You will receive a Form 1099-MISC if you have done any work as an independent contractor, such as freelance writing or acting, and a Form 1099-C is used to report a cancellation of debt.
Function
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Form 1099 is used to track income earned by independent contractors or freelancers and its primary function is to allow the government to ensure the collection of all taxes owed. It is useful to creditors, employers who hire freelancers and investment companies to help reduce their tax burdens, as they can claim less income by using a 1099 form to report compensation, dividends, interest or debts paid.
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Significance
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If your credit card company has written off money you owed, or you have negotiated a settlement payment for less than you owed, a 1099 form can be filed for non-payment of credit card debt. If a creditor is unable to collect credit card debt from you after a set period of time, such as one to three years after you default, or if a creditor agrees to a settlement payment, the creditor reports the unpaid or forgiven amount as a loss to the IRS. The creditor will issue a Form 1099-C (Cancellation of Debt) to you if the amount is $600 or more, and the IRS considers the uncollectable or forgiven amount to be taxable income for you.
Effects
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If your credit card company has sent the Form 1099-C to the IRS and you have failed to report the income on your tax return, you could receive a tax bill or audit notice from the IRS. Even if you never receive a Form 1099-C from the creditor, you still need to report the income otherwise you could end up owing more money, due to accumulated interest and late penalties.
Exceptions
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In some cases you may not have to report the write-off or forgiven debt as income. You may not have to report it if you discharge the debt in a Chapter 7 bankruptcy, if you were insolvent (debts exceed assets) before the creditor agreeing to write off or settle the debt, or if the creditor accepts the settlement as payment in full and agrees not to report the remaining portion as a loss. A qualified tax preparer can determine if your situation fits any of the exceptions.
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