You may owe thousands in taxes on some mortgages and credit card debts.

Millions of Taxpayers Owe Extra for Forgiven Debts!

1099-C FormIRS Form 1099C has become more common lately for people who have had debt forgiven due to different circumstances. Whether or not the forgiven debt is taxable depends on the circumstances. At the time of this writing, forgiven mortgage debt between the years of 2007 and 2013 is not taxable, but you still may get the IRS 1099-C form in January and you still have to declare it. How to fill out a tax form for forgiven debt is a different issue not discussed here. In the year 2012, there were over six million of these forms mailed out to people whose debt was written off, and in 2013 there could be even more.

Previously, credit card companies, auto loan guarantors, and payday loan processors may have written off balances without sending out a 1099-c but now any debt over six hundred dollars that gets forgiven will generate a 1099.

When is Forgiven Debt Taxable?.

1099-CWhether or not you have to pay taxes on this money depends on the circumstance. If the debt was forgiven in a bankruptcy, it is not taxable. If you had a student loan but canceled it through a program where you performed public service, worked in inner city schools, or did something that pays off the loan in lieu of money, then this would be non-taxable. If you were insolvent at the time your debt was forgiven then you may not be taxed, but you may need to prove that you owed more money than what you owned at the time, and of course you are going to have to prove that by filing a form with the Internal Revenue Service.

1099-C Exceptions & CODI

One exception to the mortgage exemption rule for 1099-c debt involves whether your residence was primary or secondary. If your vacation home was foreclosed on by a bank, then you may end up paying taxes on the forgiven amount as if it was income.

One of the reasons that the 1099-C Cancellation of Debt Income form has become such big news lately is that many collection agencies, banks, and credit card issuers are sending out these forms for debts that may be decades old. Tax experts have conflicting advice on the matter, and some are recommending that you declare the income on your current tax form, which can create brand new headaches that tax software can’t fix. If you get a CODI in the mail, you may not remember the debt, or it could have been taken over by a bank that bought out the accounts of an institution you borrowed from in the past. In some worst case scenarios, creditors may assign debt to your name on a 1099C CODI even though you were not the actual debtor.  Previously, collection agents were known to harass people with similar names into paying off other people’s debts, and damaging the credit ratings of innocent consumers, and this practice may result in cancellation of debt income statements years later. Collectors who gave up on “zombie debt” may now be filing these forms as an administrative way of getting people to call up and bring the debt current, which means that the collection cycle goes back to day one.

Some consumers have reported that debts charged off years (or even decades) ago have generated 1099-C forms which indicate the forgiveness date is 2011 or 2012, and usually the last day of the  year. What can you do if you get a CODI notice? You may have to actually talk to an IRS employee depending on the circumstance of when the debt was discharged. For example, if you were insolvent when the debt was discharged, then you may not need to pay. If it turns out that you are insolvent for the tax year where you received the notice, and you can show this on Form 982, then you can put this behind you without worrying, but if you are among the people who may have been worse off in previous years, but are on the edge of a higher tax bracket today, the “income” from discharged debt can put a serious dent in your tax refund.