Settlement question (1099)

[jp2861]

Is a 1099 mandatory if a settlement is agreed upon? I've read about the $600 ceiling but is there an IRS law or some reference that says this is mandatory? I'm curious if this can be used as a bargaining tool when settling, but can't find a reference stating whether it's optional or imposed by some federal law. Thanks!

[HHM]

It's not optional. The reporting requirement is imposed by IRS regulations. Here is the instruction manual for 1099-C, notice the liberal use of the word "must" throughout the document.

http://www.irs.gov/pub/irs-pdf/i1099ac_06.pdf

For example:

Form 1099-C must be filed regardless of whether debtor is required to report the debt as income.

[magyar123]

Yes - a 1099 will be issued if the settlement is $600 or over, BUTsay you have 3 credit cards, each with a balance of $3000. If you negotiate a debt reduction of $575 with each, none of those credit card outfits will issue a 1099 because each is only $575 - even though overall you brought your debt dowb by $1725.

[HHM]

Yes - a 1099 will be issued if the settlement is $600 or over, BUTsay you have 3 credit cards, each with a balance of $3000. If you negotiate a debt reduction of $575 with each, none of those credit card outfits will issue a 1099 because each is only $575 - even though overall you brought your debt dowb by $1725.

You can even go one step further, even if you have multiple credit cards with the same bank, each debt is treated separately and each debt gets their own 1099-C issued.

So, for example, if you have 2 credit cards with Chase, each with a balance of 1,200 (total debt, $2,400), you could settle each for $625 (a savings of $575), and you will NOT trigger the reporting requirement. Thus, you will right off $1,150, but not have to pay tax.

Granted, if you are considering settling, I am guessing the balance due is such that simply reducing it by $575 would not be very helpful.

But keep in mind, there is an out from the tax if you are insolvent at the time of settlement (see IRS Form 982).

[jp2861]

HHM...yes such a small amount wouldn't do me much good. Even if I could settle for 50% I'd then end up trouble with not being able to pay the IRS the tax on the saved settlement amount. Jump out of one frying pan right into another just as hot.

Thanks for the responses to all.