8120 / What course of action is advised for a taxpayer who receives a Form 1099-C?

Based on the discussion in Q 8104 and Q 8105, a taxpayer who receives a Form 1099-C has the following two concerns: (1) has the debt been formally discharged by the creditor, and, if so, was it discharged in that year; and (2) is the discharge of debt taxable?

As to the first concern, based on the majority view discussed in Q 8105, the taxpayer should contact the creditor to request formal confirmation of its discharge of the debt as well as the year of discharge. By securing a formal confirmation, the creditor would be barred from pursuing legal action against the taxpayer. If the creditor fails to provide the taxpayer with formal confirmation, the taxpayer should attempt to ascertain the validity of the identifiable event the creditor relied upon in issuing the Form 1099-C.

Example: In 2019, Asher received a Form 1099-C from a credit card company. In Box 6, Code G (decision or policy to discontinue collection) was entered. Although Asher requested a formal confirmation of the discharge in 2019, the credit card company failed to respond. Upon further review of his documentation, Asher ascertained the credit card debt was incurred in 2008 and the applicable statute of limitations for collection expired in 2011. Therefore, Code C (statute of limitations or expiration of deficiency period) was the proper identifiable event that should have been reported in 2011. Based on that information, Asher can challenge the inclusion of the discharged debt as income in 2019 as well as defend any subsequent collection action initiated by the credit card company.

As to the second concern, the receipt of a Form 1099-C reporting a substantial amount of discharged debt can be a daunting experience because of a large potential tax liability. As discussed in Q 8101, however, a Form 1099-C is simply a reporting requirement of the creditor and does not establish whether the amount reported is taxable to the debtor. For that reason, the taxpayer should consider the various exclusions (discussed in Q 8119 to Q 8124) that may apply to render all or part of the discharged debt nontaxable.

Example: In 2020, Asher received a Form 1099-C from a credit card company reporting a substantial amount of discharged debt. However, the debt reported on the Form 1099-C was discharged in bankruptcy. Because debt discharged in bankruptcy is excluded from gross income, Asher would not be taxed on such income. Attaching Form 982 to his 2020 Form 1040, Asher should check line 1a, and, thus, exclude it from gross income.