IRS form 1099-C
The IRS 1099-C is a tax surprise that won’t make you smile. “Forgive but collect” is the IRS motto when it comes to cancelled debt.
What happened to “Forgive and forget”?
Nothing. The IRS just looks at it differently. The IRS really doesn’t care that your creditor forgave a portion of your debt, and they probably don’t care how your creditor explained it to you, but they do care about getting their share. They don’t forget to collect! The IRS 1099-C is the little surprise they use to collect their share.
Their share of what? The tax law generally considers the amount any creditor writes off as earned income, and therefore taxable. Your creditor is well aware of this and will inform the IRS of your earnings. Your creditor will also let you know with a Form 1099-C or something similar.
Mortgage Forgiveness Debt Relief Act
On December 18, 2015, President Obama signed a bill that extended the Mortgage Forgiveness Debt Relief Act through December 31, 2016. The extension also retroactively covers mortgage debt cancelled in 2015. Normally, debt that has been forgiven by a lender counts as taxable income.
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