Significance

• A 1099-C indicates that your lender has chosen to cancel your debt. Since the cancellation means that you are no longer responsible for paying the debt, the debt is now treated as income. In most instances, you are required to include the amount in box 2 of your 1099-C as taxable income on your tax return.
  
  

Process

• The lender will send a copy of the 1099-C to both you and the IRS. The IRS will adjust your tax return when they receive the 1099-C. However, the 1099-C will increase your tax liability and may cause you to owe additional tax. It is therefore in your best interest to file an amended tax return to add the 1099-C to your income rather than waiting on the IRS to mitigate any penalty and interest charges. You will need to download IRS Form 1040-X from the IRS website or order the form by calling 800-TAX-FORM. Once you've completed the form, attach any amount you owe to your 1040-X and mail it to the IRS processing center.
  
  

Considerations

• Some cancellations of debt require that you include additional schedules to your Form 1040-X. For example, you will need to attach Form 4835 if your debt was in any way related to farm rental activities or Schedule C if your debt was related to a sole proprietor ship. In addition, you are still responsible for reporting your cancelled debt even if you did not receive a 1099-C in the mail.
  
  

Exceptions

• There are some cancellations of debt which are not included as income and therefore require no action from the taxpayer. College graduates who choose to work in certain service industries are eligible to have their student loan debt forgiven. This variety of cancellation of debt is not taxable regardless of whether or not you receive a 1099-C. Some cancellations of debt, such as those covered under title 11 of the bankruptcy code, are not taxable.
  
  

Time Frame

• The time frame for processing an amended return is 8 to 12 weeks. Also, the form must be mailed in and cannot be submitted electronically. If you have any questions with regard to filing or completing your return, call the IRS at 800-829-1040 between the hours of 7 a.m. and 10 p.m.