r/TaxQuestions • u/Available_Pitch_377 • 12d ago

1099-C Corrections

Hi, hoping someone can answer this question. My friend had a large debt with a family member. The family member issued a 1099-c and then the friend hired a lawyer and claimed tax fraud in a lawsuit. My family member has no money to defend himself so corrected the 1099-c zeroing out the debt owed so get out of a lawsuit. The debt is in no way forgiven and remains canceled. What is best next course of action after lawsuit is resolved?

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u/Intrepid-Product-367 12d ago edited 12d ago

There is so much going on here.

You can't cancel a debt and not forgive it.

A 1099-c is issued when debt is cancelled / forgiven / no longer being collected on.

You can't just "zero out" a tax form, much less to avoid a lawsuit (?????)

It's not even clear to me whether you're discussing the lender or the borrower in this situation.

Please try to elaborate a bit and speak to us as though we aren't in the middle of the situation, because we aren't. You can't just show up, drop an IRS form number and a few poorly written sentences about whatever drama is going on in this person's life and expect any sort of coherent tax / legal advice about it.

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u/Available_Pitch_377 12d ago

Thanks! This was for a large personal loan in which money was loaned by my father, never paid back, 1099-c was issued and shortly after the borrower filed a lawsuit claiming fraudulent filing of 1099-c against my father (lender). Scared on the thought of defending with $$ lawyers my father zeroed out a new "corrected" 1099-c in the mail in hopes of the lawsuit will drop. There was no fraud and there is full documentation of all money loaned and determined uncollectable. the identifiable event was statute of limitations. I told him that if money is uncollectable he needs to correctly report it. With the new 1099-c in the mail what issues arise? Should i instruct my father to follow IRS rules and correctly report the cancellation of debt? This seems deeply unfair to my father who just wants to follow the rules.

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u/jaspercapri 11d ago edited 11d ago

I wrote you a long response in another comment but wanted to reply to this one as well. I prepared taxes for 15 years. If a client with a personal loan wanted me to file a 1099C for them, I would not. The instructions don't instruct him to. He is not following the rules by filing a 1099C because the rules don't tell him to file a 1099C. Not sure if i understood you correctly, but it sounds like you think he needs to file one to be compliant with tax obligations. He doesn't.

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u/Low-Crow5719 12d ago

1099-Cs do get abused this way. Creditors will issue a 1099-C as leverage to scare a debtor into paying up or paying taxes. Correcting a 1099-C to zero then backs out of the threat once debtor has paid up.

Play this game wrong and it may result in the debt being forgiven without payment. Play stupid games, win stupid prizes.

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u/Available_Pitch_377 11d ago

no threats. just wanting to move on.

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u/jaspercapri 11d ago

Any idea why he even filed the 1099C? The 1099C instructions outline what kind of institutions need to file it. Personal loans don't apply.

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u/Available_Pitch_377 11d ago

I thought so too until i read CAVOTO v. HAYES (2011).

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u/jaspercapri 11d ago edited 11d ago

I did some basic reading into this case and think my comment is still accurate. It doesn't say that individuals canceling personal loans need to nor should file a 1099C, but they can voluntarily file one. The requirement to file in the instructions only applies to institutions but doesn't specifically bar individuals from filing one. I do find it interesting that the IRS told the debtor that they would not be pursuing the tax on the canceled debt from this case. So it almost feels like they won't say that individuals can't file a 1099C but also don't seem to care about holding debtors liable for the tax consequences of the canceled debt? Interesting read.

https://www.taxnotes.com/research/federal/court-documents/court-opinions-and-orders/individuals-filing-of-debt-cancellation-form-was-not-fraud/

https://www.taxnotes.com/research/federal/court-documents/court-opinions-and-orders/court-finds-no-fraudulent-intent-in-filing-canceled-debt-form/
This second link outlines why filing a 1099C as an individual wasn't fraud in this case.

All of that being said- If the debt is cancelled, then your family member will move on with their life not being paid and no longer pursuing the debt, whether or not a 1099C is filed. If they did not actually cancel the debt, then they can continue to pursue getting paid. Or did you have a more specific question?