Joe Kristan has a very important post today about a Tax Court ruling that says creditors need more than a 1099-C to fix the amount of a debtors debt cancellation income.
Here is the post in its entirety:
When the credit card company settles your account for less than you owe, the tax law says you have “cancellation of indebtedness” income. The bank has to issue a 1099-C, and if you don’t report the debt forgiveness income listed on the form, the IRS comes calling. If the taxpayer fights the IRS, they IRS usually wins.
Not always. The Tax Court yesterday ruled that the IRS couldn’t rely on the 1099-Cs to assess tax on a Pennsylvania couple who disputed their credit card balance:
In this case, respondent may not rely on the Forms 1099-Csubmitted by CitiFinancial and Chase as evidence of the amount of debt that was definite and liquidated. Section 6201(d) provides that in any court proceeding, if a taxpayer asserts a reasonable dispute with respect to any item of income reported on an information return and has fully cooperated, the Commissioner shall have the burden of producing reasonable and probative information concerning the deficiency in addition to the information return. Petitioners have asserted reasonable disputes with respect to the amounts reported by CitiFinancial and Chase. Respondent has failed to produce reasonable and probative information independent of the third-party information returns.
The Moral? If you can show that you have a dispute with the credit card issuer over the balance, the IRS needs more than the bank’s say-so to assess debt forgiveness tax.
I have seen many cases where a disgruntled ex-partner or creditor rifled off an erroneous 1099-C just to get the taxpayer audited by the IRS. This case should help taxpayers who find themselves in that untenable position.
On the flip side, creditors need to be prepared to show proof of the debt in order to claim a tax deduction for their loss on debt cancellation.
I read Joe’s TaxUpdates blog every day and his posts are the inspiration of much of what you read here. You should read him too.
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