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  1. #1
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    Default Tax Liability for Bad Debts

    My question involves collection proceedings in the State of: PA


    I recieved a phone call today from a debt collector involving an old account with Express clothing store in the amount of $850. They told me according to their records the last payment made was December 2006 and they acknowledged the fact the SOL has passed to be sued. However they said that didnt matter because they are threatening a "tax lability" and further threatening that it could affect my student loans (which doesnt make sense to me because I am paying my monthly payments for student loans and I dont need to borrow any more for that). I was just windering if someone could explain what they are talking about and how this could affect me? Thanks.

  2. #2
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    Default Re: Tax Liability

    If the debt is forgiven (1099-C issued), the IRS treats the debt as income and it must be reported on your tax return as income.

  3. #3
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    Default Re: Tax Liability

    Thank you for the response. The debt is not forgiven. They were asking for a payment and said that if I did not pay the balance (they offered a reduction) or set up a payment plan they would forced to set up a tax liability. At first I thought they were talking about a tax lien but I believe they need a judgment for that. She made it clear it was not a threat of a judgment, but it sounded like a form of a simliar threat to sue with this "liability".

  4. #4
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    Default Re: Tax Liability

    Quote Quoting robnon
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    Thank you for the response. The debt is not forgiven. They were asking for a payment and said that if I did not pay the balance (they offered a reduction) or set up a payment plan they would forced to set up a tax liability. At first I thought they were talking about a tax lien but I believe they need a judgment for that. She made it clear it was not a threat of a judgment, but it sounded like a form of a simliar threat to sue with this "liability".
    She is merely talking about issuing a 1099-C which makes the 850.00 taxable income to you. There is nothing else that it could be. It also would have zero effect on your student loans.

    Debt collectors are getting very agressive lately with the scare tactics.

  5. #5
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    Default Re: Tax Liability

    Debt collectors are, to use the legal term, scum. They can't collect after they forgive the debt, which they're not likely to do. If they do forgive the debt and report it on a 1099-C to the IRS, you'll just have to pay taxes on it when you file for that year (the year forgiven, not when the debt went past SOL or you originally defaulted). Depending on what your other income is, the worse is you'll owe uncle sam $200 or so. That's a whole lot better than paying these slime on a time barred debt. Tell them, both on the phone, and in writing that you do not wish to contact them. If they sue you, you have an immediate defense, and frankly I'd point out in your motion to dismiss that the collector KNEW before he filed that the debt was time barred. That usually incurs a bit of wrath from the bench.

  6. #6
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    Default Re: Tax Liability

    Writing off a debt and issuing a 1099-C is not the same as "forgiving" a debt. Writing off a debt is an accounting event, does not indicate forbearance or forgiveness, and a debt collector can keep on working to collect the debt in the same manner as it did the day before.

    If you are getting a loan for which a credit check is required, a negative entry on your credit report could affect your ability to get the loan.

  7. #7
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    Default Re: Tax Liability

    Quote Quoting Mr. Knowitall
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    Writing off a debt and issuing a 1099-C is not the same as "forgiving" a debt. Writing off a debt is an accounting event, does not indicate forbearance or forgiveness, and a debt collector can keep on working to collect the debt in the same manner as it did the day before.

    If you are getting a loan for which a credit check is required, a negative entry on your credit report could affect your ability to get the loan.
    Writing off the debt is an accounting event. Issuing a 1099-C "Cancellation of Debt" , therefore making it taxable income to the taxpayer, does indeed cancel the debt, in a similar manner as when a debt is discharged in bankruptcy. That however, often does not stop the junk debt collectors from buying up debts for pennies on the dollar and attempting to collect on them.

  8. #8
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    Default Re: Tax Liability for Bad Debts

    The only entities that can issue 1099c are financial institutions (bank, trust company, building and loan or saving and loan associations), credit unions, federal government agencies, federal deposit ins. corp., resolution trust corp, national credit union admin., any military dept., u.s. postal service, postal rate commission, a corp. that is a subsidiary of a financial institution, or an organization whose significant trade or business is the lending of money, such as a finance co., or credit card co. The average person or company not included in one of these entities can't provide a 1099c to a debtor or the IRS irregardless of monies owed to them by a debtor.

  9. #9
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    Default Re: Tax Liability for Bad Debts

    Quote Quoting llworking
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    Writing off the debt is an accounting event. Issuing a 1099-C "Cancellation of Debt" , therefore making it taxable income to the taxpayer, does indeed cancel the debt, in a similar manner as when a debt is discharged in bankruptcy. That however, often does not stop the junk debt collectors from buying up debts for pennies on the dollar and attempting to collect on them.
    First, a junk debt buyer does not take rights that are superior to those of the original debt owner, so the analogy to bankruptcy doesn't hold - a junk debt buyer has no right to collect a discharged debt.

    Beyond that, let's examine the legal authority on this subject:
    Quote Quoting US v. Reed (Dist. Court, ED Tennessee, 2010)
    Reed argues that the United States is barred from collecting on the loan because her debt has already been discharged. In support of this argument, Reed relies on the 1099-C received from BLC.

    However, a Form 1099-C, as a matter of law, does not operate to legally discharge a debtor from liability on the claim that is described in the form. See In re Zilka, 407 B.R. 684, 689 (issuance of IRS forms did not itself operate to legally discharge debtor form further liability on loans); Owens v. Commissioner, 2003 WL 21196200 (5th Cir. 2003) (issuance and filing of Form 1099-C does not constitute actual cancellation of the loan); Leonard v. Old National Bank Corp., 837 N.E.2d 543, 545 (Ind.Ct.App. 2005) (filing a Form 1099-C is merely an informational filing with the IRS done to report an event that has already happened, and thus does not operate to cancel debt itself); Sims v. C.I.R., 2002 WL 1825373 (Form 1099-C does not establish that petitioner's debt was ever discharged, which necessarily means that such form did not operate to cancel such debt).
    Quote Quoting In re Sarno, 463 BR 163 (Bankr. Court, D. Massachusetts, 2011)
    The requirements for the issuance of forms 1099-C are set forth in § 6050P of the Internal Revenue Code (26 U.S.C. § 6050P) and 26 CFR 1.6050P-1. The latter provides:

    Except as provided in paragraph (d) of this section, any applicable entity (as defined in section 6050P(c)(1)) that discharges an indebtedness of any person (within the meaning of section 7701(a)(1)) of at least $600 during a calendar year must file an information return on Form 1099-C with the Internal Revenue Service. Solely for purposes of the reporting requirements of section 6050P and this section, a discharge of indebtedness is deemed to have occurred, except as provided in paragraph (b)(3) of this section, if and only if there has occurred an identifiable event described in paragraph (b)(2) of this section, whether or not an actual discharge of indebtedness has occurred on or before the date on which the identifiable event has occurred.

    It is apparent from this regulation that a form 1099-C is "informational" and that it must be filed "whether or not an actual discharge of indebtedness has occurred." In construing this regulation the IRS has stated that it does not view a form 1099-C as an admission by the creditor that it has discharged the debt and can no longer pursue collection thereof. Zilka v. Bayer Emp. Fed. Credit Union (In re Zilka), 407 B.R. 684, 688-89 (Bankr.W.D.Pa.2009). In Owens v. Commissioner, 67 Fed.Appx 253, 2003 WL 21196200 (5th Cir.2003), the U.S. Court of Appeals for the Fifth Circuit observed that a form 1099-C evidences an intention to cancel "not, we must point out, actual cancellation of the loan." Id. at *3; see also In re Zilka, 407 B.R. at 690.
    Quote Quoting Bank v. Alan Green Family Trust (Dist. Court, D. Nevada, 2011)
    Moreover, the Court denies leave to amend because Defendants have not provided any authority which states that when a bank charges off a loan the legal obligation to repay the loan is extinguished. The Ninth Circuit case that Defendants cite to does not support their argument. In Santa Monica Mountain Park Co. v. United States, 99 F.2d 450 (9th Cir. 1938), the Ninth Circuit only stated that if a taxpayer considered a debt uncollective for income tax purposes, the taxpayer could not use the same uncollectible debt as assets for tax purposes. Id. at 455. The Ninth Circuit did not hold that a charge off extinguished legal liability for the debt. In fact other courts who have addressed this issue have found that a charge off does not extinguish liability for the debt. See In re Zilka, 407 B.R. 684, 687 (Bankr. W.D. Pa. 2009) (finding that, as a matter of law, when a lender issues an account statement to its borrower indicating that an outstanding loan balance equals $0.00 because such loan has been charged off, it is not the legal equivalent of forgiving (i.e. discharging liability on) a debt). Accordingly, the Court grants the motion to dismiss counterclaims (#31) without leave to amend.
    That is, the courts seem to be pretty consistent in stating that a 1099-C does not cancel a debt. If you have other authority that holds to the contrary, please share it and we can try to figure out whether and how that authority can be reconciled with the holdings of other courts.

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