Tax Woes: The Trouble With the 1099-C

February 28, 2012 — -- It's perhaps the biggest tax mess of 2012: An estimated 6.3 million 1099-C forms reporting cancellation of debt income have gone out to taxpayers. Some of those forms are being sent to consumers for very old debts that they never thought they would hear about again.

To make the situation worse, the IRS is arguably providing inadequate guidance to taxpayers, and even tax professionals have different opinions about how to deal with them.

Why now? Why would creditors suddenly be sending out these forms for ancient debts? "There are all these new 1099 reporting requirements coming out this year," says Kay Bell, contributing tax editor for Bankrate.com and author of The Truth About Paying Fewer Taxes. There is a push by the IRS to "get more information to get people to pay what they owe regardless of the source."

[Infographic: What to Do If You Get a 1099-C]

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Here are a just a few comments and questions we've received in response to stories on this topic at Credit.com:

I just received a 1099-C from Bank of America. I do not remember the debt, but I have had no dealings with them for more than six years. The statute of limitations on credit card debt in Florida is 4 years. Is there a time frame within which the banking institution has to "forgive" a debt, and a time limitation on when they may file a 1099-C with IRS? —John

I have received three 1099-Cs from a debt collector (Asset Acceptance). I do not recall getting any mail from this company and they are not on my credit reports. I have read a lot of conflicting advice about whether or not this is even a legitimate 1099-C since they are a junk debt buyer. —Charlotte

I'm glad I found this article! I received a 1099-C today for an old credit card debt which dates back to 2001. This date is way past my state's statute of limitations which until last year (4/11) was 3 years but was changed to 6 years. The debt is uncollectible and unreportable so how can they forgive something they have no right to collect? —Nancy

"If ever the term "blast from the past" were applicable to a section of tax law, the provisions for cancellation of debts would rank near the top," says Phil Sepp, Executive Vice President of the National Taxpayer's Union. "Taxpayers can receive some nasty tax surprises from this area of law, some of them dating back quite some time. Also, this area of tax law is among the most complex for individuals and their preparers, definitely in league with the Alternative Minimum Tax and the latest investment income reporting requirements."

The National Taxpayer Advocate, the independent advocacy arm of the IRS, has noted that 1099-Cs for Cancellation of Debt Income (CODI) can be a burden to taxpayers, stating in a report to Congress that "creditors sometimes make errors on the form that debtors then may have to wage an uphill battle to correct."

It can be a minefield, agrees Jennifer MacMillan, an enrolled agent and member of the National Association of Enrolled Agents. "There are so many reasons why a 1099-C can be wrong."

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When Are Lenders Supposed to Send 1099-C Forms?