Many of our clients come to us and want to settle their debts. Sometimes this makes sense, but sometimes it makes a bad situation worse.
Generally, if you pay a creditor less than you owe, they will send you a Form 1099C – Cancellation of Debt form – at the end of the year. The IRS considers this cancellation of debt as “income” and will assess income taxes on your savings.
Millions of 1099-C’s have been sent out in the past few years, and oftentimes they take people by surprise.
If you are considering settling more than ONE debt, and/or if the amounts are significant, you should speak to an attorney or an accountant before you do anything.
If you do get a Form 1099-C, certainly don’t ignore it! If you do, the IRS will almost certainly track you down and send you a tax bill or a notice of deficiency if you didn’t include the “income” on your tax return. We’ve seen the taxes, interest and penalties, add up quickly in these situations.
On the other hand, sometimes we’ve seen people pay taxes on these Form 1099-C’s when they didn’t really have to. There are some exceptions to the rules, one of which is when you are deemed Insolvent. If you can convince the IRS you were insolvent at the time you negotiated the settlement on your credit card (or whatever), and if you complete IRS publication # 4681, you will not have to pay any extra taxes.
Call or contact us for a CONFIDENTIAL, FREE appointment with experienced attorneys. You have questions that need expert answers from the expert lawyers at Beckett Law. It doesn’t matter where you live (Avon, East Hartford, Glastonbury, Manchester, Newington, New Haven, Rocky Hill or Waterbury) our service area allows us to help anyone experiencing financial difficulty throughout all parts of Connecticut.