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Are you filing a 1099C for uncollected debt?
When settling with a client on a negotiated sum, with the intent to write off the balance as bad debt, you should file a 1099C to the IRS. This is referred to as “Cancelled Debt 1099C”. Doing this will cause the client to have to pay taxes on the amount not paid. As a creditor this can also be used as a tool to collect the full balance of a debt. If you explain to the debtor that the unpaid amount will be submitted to the IRS, some clients would prefer that the IRS not be involved.
IRS reporting - www.irs.gov explains: Any financial institution that forgives or writes off $600 or more of a debt's principal (the amount not attributable to interest or fees) must send you and the IRS a Form 1099-C at the end of the tax year. These forms are for reporting income, which means that when you file your tax return for the tax year in which your debt was settled or written off, the IRS will make sure that you report the amount on the Form 1099-C as income.
Here's how it works. Creditors often write off debts after a set period of time -- for example, one, two, or three years after you default. The creditor stops its collection efforts, declares the debt uncollectible, and reports it to the IRS as lost income to reduce its tax burden. The same is true when you negotiate a debt reduction. The creditor will report the amount you didn't pay as lost income to the IRS.
Of course, the IRS still wants to collect tax on this money, and it will turn to you for payment. Because you no longer have to pay the full amount of the debt, the IRS treats the forgiven amount as gained income, for which you should pay income taxes.
For more information, check out Publication 4681 http://www.irs.gov/pub/irs-pdf/p4681.pdf
Forms may be ordered through IRS.gov and are free.
D. Poplawski 2014