IRS Form 1099-C, Cancellation of Debt, is used by a lender to report canceled or forgiven debt of $600 or more. Canceled debt is the amount of loan that the borrower is no longer required to pay. Debt may include principal, interest, fees, penalties, administrative costs, and fines. The lender may cancel the entire debt or any component of debt, such as whole or part principal, fees, interest, or any other amount. Since mortgage transactions are lending transactions, only the principal amount that has been canceled is reported in Form 1099-C. Bankruptcies, foreclosures, and settlements (deed-in-lieu) are common ways in which borrower’s debt may be canceled.
The lender has to prepare three copies of Form 1099-C: Form A, Form B, and Form C. Form A is provided to the IRS, Form B is provided to the borrower, and Form C is retained by the lender for its records. The form is generally issued by the default management group within the Servicing department of the lender. Alternatively, the lender may have a separate regulatory reporting or Tax/IRS reporting group within its Servicing department.
Form 1099-C needs to be filed by federal government agencies, financial institutions and any other organization whose significant trade or business is the lending of money. Included are domestic banks, credit unions, trust companies, and building and loan or savings and loan associations.
|Code||Type of Event|
|B||Other judicial debt relief|
|C||Statute of limitations or expiration of deficiency period|
|E||Debt relief from probate or similar proceeding|
|G||Decision or policy to discontinue collection|
|H||Expiration of nonpayment testing period|
|I||Other actual discharge before identifiable event|
IRS considers canceled debt as income in the hands of the borrower and requires you to report the canceled debt on the "Other income" line of the Form 1040. In fact, you are required to report canceled debt even if it is less than $600. However, not all canceled debt is required to be reported. IRS Publication 4681 provides details of exceptions to reporting canceled debt on the 1040.
You should retain the Form 1098 for at least 3 years from the date when the return is due. Longer time periods may apply under specific circumstances such as when you do not file a return or file a fraudulent return. IRS Publication 17 provides general record retention guidelines. You should contact your tax preparer for guidance for your specific circumstances.
State laws may also require a longer retention periods.
Form 1099-C is filed in the year following the year in which the debt was canceled. The due dates are:
You are required to make a reasonable effort to obtain the correct name and taxpayer identification number (TIN) or Social Security Number (SSN) of the borrower. Generally, you would obtain the SSN during application stage. If for some reason it is not available, then you must request the borrower's SSN before issuing the Form 1099-C.
IRS requires that if the debt is owned by more than one lender, each lender must issue a Form 1099-C if that lender’s part of the canceled debt is $600 or more. You will be deemed to have met your filing requirements if a lead bank, fund administrator, or other designee prepares the form on your behalf. The designee may file a single Form 1099-C reporting the aggregate canceled debt or may file Form 1099-C for your part of the canceled debt.
Very often a mortgage loan has more than one borrower with each borrower jointly and severally liable for the debt. Loans with multiple borrowers where the debt is of $10,000 or more and was incurred after 1994, you are required to report the entire amount of the canceled debt on each borrower's Form 1099-C. For debts less than $10,000 or which were incurred before 1995, you must file Form 1099-C only for the primary borrower. If at the time of origination the borrowers were spouses living at the same address and subsequent to loan origination you have no information that these circumstances have changed then you may file only one Form 1099-C.
The IRS provides certain exceptions when the canceled debt is not required to be reported on the Form 1099-C. Learn more about the exceptions in the IRS publication Instructions for Forms 1099-A and 1099-C.
IRS requires you to maintain a copy of the Form 1099-C or be able to reconstruct the data for at least 4 years from the due date of the return.
IRS Form 1099-C webpage provides filing instructions, recent developments, and information about any future updates or developments affecting Form 1099-C.
Updated: Aug 29, 2013