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How to Deal With a New 1099-C Issued on Old Debt Using Little Known IRS Form 4598

By on April 27, 2018

It seems more and more people are getting tax form 1099-C issued now for the forgiveness of old debt from as long as twenty years ago. That’s a problem for consumers. This old debt is sometimes called “zombie debt” because it appears to come back from the dead.

The first thing you should do is not panic. There is a good way to deal with this old debt but it is going to take a methodical approach. The most disturbing part of this process is if the creditor had issued you the 1099-C for cancellation of debt, in the year the debt was actually canceled you might not have had to pay any taxes on the forgiven debt if you had been insolvent at the time. You could have filed IRS form 982 and had the taxes eliminated.

But now years later your financial situation may have changed for the better and up pops this old debt again. If you are no longer insolvent, meaning your liabilities are bigger than your assets, then you might be told you have to pay income tax on the forgiven debt just as if you had earned the forgiven debt as income this year.

Back the Tax Bus Up

The IRS has a process in place for dealing with this situation. Ironically, however, they do not provide this form on their website at IRS.gov. Jim Buttonow, a CPA and frequent contributor to this site says that to deal with this errant 1099-C consumers should:

  • Call the IRS (1-800-829-1040 ) and have an IRS representative initiate a Form 1099 complaint. The IRS will fill out form 4598, “Form W-2, 1098, or 1099 Not Received, Incorrect or Lost”
  • A letter will be sent to the creditor requesting that they furnish a corrected Form 1099 to the taxpayer within ten days. The letter advises the payer of their responsibilities to provide a corrected Form 1099 and of the penalties for failure to do so.
  • The taxpayer will be sent a letter that provides instructions and a copy of the Form 4598, “Form W-2, 1098, or 1099 Not Received, Incorrect or Lost.” The Form 4598 may be used in the event that the payer does not provide you with the corrected Form 1099 in time to file your tax return.
  • Attach the Form 4598 to the tax return. Be prepared to support the change to the Form 1099 with substantiation that proves the adjusted amounts.

The last public mention I could find of this little-known form was from the Federal Register in 2007.

If you feel you are not qualified to handle this process and deal with the IRS on your own, there is no substitute for good tax advice. Seek a local tax professional or an Enrolled Agent to assist you in this matter.

Regardless, make sure you document and keep a record of all contact with the IRS on this matter. Properly dealing with this can save you tens of thousands of dollar in tax you may not have to pay.

A recent court case involved a similar matter. In this case – the borrower stopped paying their credit card debt in 1994. The lender wrote off the debt in 1996. They stopped collecting in 1999 and subsequently a collection company attempted to collect on the previous debt through automated means.

The borrower argued that the meaningful collection and statute to collect had long passed. In the case, the Court agreed and the cancellation of debt was not income in 2008- when the 1099-C was issued. The big problem: they had to fight the IRS to win it and that is an expensive battle.

Tax Case Summary 2012-46

“The Tax Court, in a summary opinion, has concluded that a taxpayer didn’t have cancellation of debt (COD) income in the tax year that a collection agency that acquired his defaulted credit card account ceased collection activities and issued a Form 1099-C, Cancellation of Debt. IRS failed to rebut the presumption that the debt was discharged in an earlier tax year when a 36-month nonpayment testing period expired, and it was clear that the debt would not be repaid.

Background. A debt is considered canceled or discharged so as to result in COD income at the moment that it becomes clear that the debt will never have to be paid. An identifiable event that fixes a loss with certainty indicates the time when a debt has been discharged. (Cozzi, (1987) 88 TC 435)
The Tax Court has held that a rebuttable presumption arises that an identifiable event occurred in a calendar year if, during a testing period (of generally 36 months) ending at the close of the year, the creditor has received no payments from the debtor. (Kleber, TC Memo 2011-233) This presumption may be rebutted in one of two ways:

  1. Where the creditor (or a third-party collection agency on behalf of the creditor) has engaged in significant, bona fide collection activity at any time during the 12-month period ending at the close of the calendar year. However, ministerial collection action, such as automated mailing, doesn’t constitute “significant, bona fide collection activity” for this purpose.
  2. Where facts and circumstances existing as of January 31 of the calendar year following the expiration of the 36-month period indicate that the debt hasn’t been discharged. Such facts and circumstances include the sale or packaging for sale of the debt by the creditor.

Facts. On Oct. 22, ’94, David Scott Stewart incurred a credit card obligation to Maryland Bank National Association (MBNA). Sometime between Oct. 22, ’94, and Sept. 6, ’96, he defaulted on this obligation. He made no payments on the debt after the default. MBNA charged off the debt on Sept. 12, ’96.

At some time between Sept. 12, ’96, and Dec. 28, 2007, NCO Portfolio Management, Inc. (NCO) acquired Stewart’s defaulted account from MBNA.

On Dec. 28, 2007, Portfolio Recovery Associates, LLC (PRA) acquired Stewart’s defaulted account from NCO. Although aware that a State statute of limitations period for beginning collection activity on the debt had expired on Feb. 15, 2001, PRA began making automated attempts to collect payments from Stewart. On Apr. 14, 2008, PRA received a letter from Stewart (2008 letter) that demanded PRA cease its automated collection activities. PRA did so and took no other collection-related action. PRA issued a Form 1099-C to Stewart, which reported $8,570.71 in COD income for the 2008 tax year.

Observation: As the Tax Court noted, the expiration of a State statute of limitations doesn’t extinguish an underlying debt obligation. It simply provides an affirmative defense to an action by the creditor. Although under some circumstances the expiration of such a limitations period can be an identifiable event, it’s not conclusive as to when a debt has been discharged.

Stewart’s timely filed 2008 return did not include the purported COD income. On audit, IRS issued a notice of deficiency, increasing Stewart’s income by the amount reported on the Form 1099-C. Stewart sought relief in the Tax Court.

Parties’ positions. Stewart contended that the debt at issue was actually discharged long before 2008. He further contended that the amount of income reported on the Form 1099-C was incorrect.

On the other hand, IRS contended that Stewart’s debt was discharged in 2008 when PRA issued Form 1099-C. IRS noted that a decision by a creditor to discontinue collection activity may require that creditor to issue a Form 1099-C. Under Code Sec. 6050P, an applicable financial entity is generally required to file information returns with IRS reporting debt discharges of $600 or more. Under Reg. § 1.6050P-1(b)(2)(i)(G), a discharge of debt is defined as including a decision by the creditor, or the application of a defined policy of the creditor, to discontinue collection activity and discharge the debt.

Court’s conclusion. The Tax Court determined that Stewart did not have any COD income from PRA in 2008. It found that Stewart’s debt was discharged in ’99 when it was clear that the debt would not be repaid.

On the basis of the record, the Court concluded that the 36-month nonpayment testing period expired in ’99: Stewart defaulted on his MBNA account sometime after Oct. 22, ’94, and MBNA charged off his debt on Sept. 12, ’96, with Stewart making no payments on the defaulted account after the charge-off. Accordingly, the Tax Court found that there was a rebuttable presumption that an identifiable event indicating that the debt was discharged occurred in ’99.

That presumption wasn’t rebutted. There was no evidence that MBNA, NCO, or PRA engaged in significant, bona fide collection activity at any time after MBNA charged off Stewart’s debt. Although PRA engaged in automated collection activity for approximately two months after acquiring the defaulted account, these ministerial actions didn’t constitute significant, bona fide collection activity. Further, since the date when NCO acquired the account from MBNA couldn’t be identified exactly, it may well have occurred long after January 31 of the calendar year following expiration of the 36-month nonpayment period.

The Tax Court also wasn’t persuaded that PRA’s decision to cease its automated collection activity and issue a Form 1099-C in 2008 was the first identifiable event indicating that Stewart’s debt would never be repaid. While the issuance of Form 1099-C is an identifiable event, it’s not dispositive of a discharged debt. The Court said that it appeared from the record that PRA unsuccessfully attempted to revive the defaulted account in an attempt to coerce Stewart, using automated mailing and automated telephone calls, to make voluntary payments to PRA despite over a decade of nonpayment and an expired State statute of limitations period. ”

Others Weigh In

Attorney Gregory Fitzgerald also weighed in on this matter from a consumer advocate point of view when people are trying to collect on an old debt claiming the old debt has not been canceled. His advice can be found in Zombie Debt 1099 Style. And You Thought Your Old Debt Was Dead.

But in an article back in 2009, “Debt Settlements May Be Voided And the Money Due Anyway” it was stated that “The court found that despite the statements and the 1099-C form, the debtor still had an obligation to pay on the past debt. Additionally, the court found that even if a creditor issues a 1099-C form, the form does not prohibit the creditor from pursuing collection of the old debt.”

There is no shortage of issues surrounding the issuance of a 1099-C and certainly the late filing of the document. That late filing creates potentially costly hurdles and obstacles for a consumer to face. Especially when the 1099-C may be issued late and past the time which the consumer can go back and amend their tax return.

Originally posted Jun 4, 2012.


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About Steve Rhode

Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.

15 Comments

  1. Cleveland Yates

    April 12, 2018 at 1:45 am

    After doing a lot of research on the issue- its seems like in the majority of cases involved are from very old debt- over 36 months and longer. The big issue is that we NOW have to claim it on our current tax return as income- raising our income tax liability.This amount is “usually more than we were expecting or can afford to pay” the IRS at this time. The IRS/ government benefits from the additional tax revenue -so you can see why they are NOT in a big hurry to help in this situation. Actually- they have found a way to benefit from it – in the collection of additional tax revenue. The collection companies also benefit from the write off. Perhaps their thoughts were -” that we- the person that didn’t pay our debt also “benefited” . This is where I see issues of concern. 1.The amount that is on the 1099-C form is about 20% more than the actual debt amount- and sometimes almost 50% more than the “actual debt was” at time of last payment. 2. Most of the time an amended return can’t be filed because of the statue of limitations. 3. There has Not been any real credit collection activity to justify the “Increased in the write off expenses.” 4.The IRS only has “a run around system” in place right now- HENCE: you need to call them directly 1-800—— and let them know of the 1099-C Filing Date ERROR- that will start the request for a new 1099-C form – from the company that sent you the 1099-C requesting a corrected form for the year the debt was “Actually” dissolved- In the mean time- they will send you a form- “that is NOT on their website” to use for this years filing- **************But be sure and document all your calls and correspondence*************. 5. If we weren’t able to pay the debt then- its highly unlikely that we can even pay the taxes on the dept now- without causing some sort of financial hardship. So in essence we didn’t really benefit from the right off as much as everyone else has. 6. There has been conflicting information on whether or not the debt is still considered collectible by an agency or not. Most reports say that it is still past due and collectible??????????. Another article stated that if you received any other collection activity after a 1099-C was issued – to document the call and/or any other collection notice and immediate call an attorney. Hope this helps… someone-

  2. Ken

    January 30, 2018 at 8:52 pm

    TWO ISSUES: I received a “Tax Statement for year 2017” from Bank of America which is not formatted like a 1099-C, but it claims this information is being provided to the IRS. It claims a $29k cancellation of debt for a debt that has not been paid on since 2009 and has had no collection activity since 2011 or so. Can I assume this falls in the same category as the example in your article (Tax Case Summary 2012-46)?

    The other issue is that I received TWO copies of this statement because the debt was in my business name, which was a partnership with my wife, so they seem to have reported the same debt twice, once for EACH of us and now if I can’t fight the reported income due to the statute of limitations and file as Head of Household, is the IRS going to see this as TWO discharged debts of $29k each??

    • Steve Rhode

      January 31, 2018 at 8:10 am

      You really need to talk to a local tax advisor, IRS Enrolled Agent, or tax attorney.

  3. Wayleen Sutton

    January 4, 2018 at 1:26 pm

    I just received a notice from the IRS proposing changes to my 2016 form 1040 tax return stating a cancellation of debt from Capital One N.A. for the amount of $8,696 in which they added to my income for 2016 which I have NO idea what this is for but they are wanting me to pay taxes of $2,244………I have called Capital One in which I spoke to 5 people before anyone knew anything about what I was talking about and then was very vague on what this is about. I spoke with the IRS which told me to contact Capital One to get documentation to try and prove my case which AGAIN I Have NO idea what this could be about. I am just angry and upset due to I did not owe this amount and Never received this amount so how can they tell me I owe taxes on something I have no clue about. Any advice on what I need to do ??????

  4. Richard Butts

    October 14, 2015 at 3:06 pm

    Turns out, the get out of debt people above won’t even talk to you unless your tax liability is over 10k. He forgets to mention that with his “helpful” end to the article to call if needed. For a tax debt to be over 10k, the cancelled debt would have to be over 100k. How many people does that apply to? Thanks for the lack of help debtguy!

    • Steve Rhode

      October 19, 2015 at 12:41 pm

      You don’t need any specific level of debt to file a Form 4598.

  5. Jason

    May 7, 2015 at 11:48 am

    Firstly, thank you for the information and insight. You
    would think with the skyrocketing occurrence of the 1099-C since the 2008
    recession there would be more information and professional experience out there
    on how to deal with them.

    I have a question in regard to the IRS procedure for handling a dispute to a 1099-C -related CP2000. I recently received a CP2000 for the tax year 2013 stating that I owe additional tax due to COD income from a 1099-C. I didn’t address this issue on my 2013 tax return because I didn’t receive the 1099-C or any notice of the cancelled debt. I’m considering disputing the CP2000 on the grounds that the last payment was made to said account in 2008 and the 36-month non-payment testing period expired in 2011. So the first identifiable event indicating that this debt was discharged occurred in 2011, not in 2013 when the 1099-C was issued.

    After reviewing my initial response, if the IRS agrees,
    could they simply correct the issue or is this likely to turn into a lengthy appeals
    process or possibly even tax court? And will I still have the option to pay
    if I don’t want to appeal or go tax court?

    Thank you again.

  6. dje3

    February 9, 2015 at 1:37 pm

    The real issue is that there is no direct form to notice the IRS of a FRAUDULENT 1099C filing.
    The law is clear that Jan 31 following the FIRST idenitifiable event occurs the creditor MUST file a 1099C. NOTE THAT THE WORD IS IMPERATIVE. Failing to file at the first idenitfiable event includes the packaging for sale of an unpaid debt, or Jan 31 following 3 years of nonpayment or charge off by the creditor, or ceasing to attempt collection (this includes failure to send billing on a regular basis and failure to file suit, it by definition must be no later than the stautory date to file a suit for recovery in a given state). If any of these have taken place then the creditor MUST send the 1099C the following Jan 31 by law. Sending it any other time is fraud by definition.
    The IRS should be charging fines (generally 100% penalty fines should be given) for failure to send the 1099C at the required time or filing it after the first event. This means that the Creditor should be charged with the income if the amount was not 1099C to the debtor in accordance with LAW.

    Remember that since PACKAGING for SALE is a specificly identifiable event, and since under UCC the date of a sale MUST be EXACT and KNOWN, that there is something specificly wrong about the above discussed case. There is NO way that any court of law can recognize a sale and transfer that has no known date. There must have been a contract, a payment and a delivery of the note by definition. If no one can show a payment then the sale itself never took place. The entire argument made in court was therefore fraudulent on its face and in violation of UCC.

    According to what I have been reading the Courts are agreeing that if the law required a 1099C to be sent in a prior year, then sending it in a later year does not create an income in that year, but instead that income was to the prior year and not applicable as it was never reported as required under law. The creditor having failed to send that information creates an IRS liability NOT to the debtor, but to the creditor. It is the same as if your employer failed to send a W statement of earnings, except that with an employer you might be held responsible because you knew or should have known of income whereas with a charged off debt you by definition had no direct knowldege of amounts and when or if the creditor caused the event conditions of a required 1099C. You could only have known under specific circumstances that must be proven.
    Congress and Senate should make it VERY clear that a compliant and investigation form for FRAUDELENT 1099 forms be in place and that prosection for TAX FRAUD on creditors take place upon filing of the document. It would be wise to allow a 10% whistle blower fee to be paid to the debtor for reporting the fraud just as with any other fraud report to the IRS. The form 1099C instructions even states that false information or fraudulent filing is illegal if I recall.
    The issue is that we are reliant upon the courts to set precident without setting rules and procedures, they leave that (or not) to the bureaucrats. That is dangerous and insane in itself.

    • Lisa

      February 26, 2015 at 8:05 pm

      Ok, so I have just received a zombie debt collection 1099c form from a credit card that I stopped paying on August 2005 due to unemployment. I tried to go back in 2008 and pay all my creditors that I owed, but was unable to find who owned this one credit card since it had been sold multiple times. The last contact I received from them was August 2006. The statute of limitations for collections is 6 years in Ohio, so that has past. They did not sue me and no liens were placed. I have not had any contact from anyone regarding this credit card. Now I have a 1099c issued April 2014 in the amount of 10,000, which has been added to my income for last year. I am currently unemployed again. I have spoke to two CPA’s and the IRS twice. No one can help me with this problem. I have mentioned IRS form 4598 also. Any advice would be helpful.

  7. John

    March 4, 2013 at 4:08 am

    Can more than one debt collector send you a 1099-C for the same debt? If bank “A” sends you a 1099-C, and then sells the debt, can the third party debt collector also send you a 1099-C later?

    • Steve Rhode

      March 4, 2013 at 11:33 am

      It is my understanding it is a one time event. Once the debt has been reported as cancelled for tax purposes it can’t be reported again.

  8. Bob King

    February 28, 2013 at 3:00 am

    So let me see if I understand this 1099-c issue. Please consider I only hold a
    high school diploma, so I confess I’m not the sharpest knife in the education drawer. Some
    Tax payer is being told they received income in the tax year 2012 that was NOT
    Earned or Unearned but was really an uncollected debt from way back when, owed
    to somebody or institution, right? That makes no since! Not in
    an economy that is in the toilet with Sequestration just around the bend and
    unemployment riding in the HIGH 7s? Not to mention Gas hovering at $4 a
    gallon refined. Did I mention millions of foreclosures that banks can’t seem to
    foreclose for some odd reason?? Why doesn’t the tax payers get a Debt Bail-Out
    if this debt is so IRS Friendly and so economically UNFRIENDLY?. Now I can understand why Home Land Security
    is buying up so much AMO. What??? have the people of this
    great country gone out of the their minds? We allow this sort of oppression and
    think America can tolerate even more of this shame, called a financial hurricane and an
    obvious a Ponzi scheme at unheard of proportions?
    We all better hope the atheists are right and there is NO GOD! I certainly
    wouldn’t want to have to deal with an Unloving God on that miserable day.

    • Steve Rhode

      February 28, 2013 at 11:27 am

      I think the issue that rips everyone up here is that there are two issues. One is an accounting function which triggers a tax issue and the other one is the debt.

      Back in the 80s after the S&L crisis the banks were required to report bad debts on their books rather than show inflated balances of non-performing debt. Once the mandatory charge off went into force that triggered the IRS 1099-C reporting.

      Now, if you are insolvent, you can be exempt from paying any tax due with IRS Form 982.

      That accounting/tax event has nothing to do with the legal sale and collection of a valid debt.

      I know it sounds crazy but since the 1980s that’s the way it works.

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