1099 for outstanding debt?

January 5, 2009 10:28 AM

1099 for outstanding debt ?? My company owes a vendor a few thousand dollars - since they have very little money and because they dispute the exact amount of the debt, they are stretching the issue out as long as possible and avoiding the debt collector's calls etc. Now the debt-collection company has left a message demanding a IRS form 1099 be submitted (to the IRS) to record the 'unearned income'.

My understanding is that a 1099 is created/required to record payments to sub-contractors (so it's from the *payer* to the IRS about the *payee*). In this situation I can't quite work out what this request might be about ... by not paying a debt, I kinda see that the debtor has 'gained' that money. But what it is the use of that form in this instance ? I'm thinking it's some kinda of trick/device by the collection agent to sound scary or to get the company to formally record the amount of the debt (remember the exact amount is disputed). I can't really see how it helps them collect the money?

Any help please?

posted by anonymous to law & government (6 answers total)

I'm not sure if this answers your question, and I'm not a tax person, but I believe that if a debt is forgiven or written off, the person or company who owed the money (but now doesn't have to pay it) has to pay taxes on the amount forgiven.
posted by small_ruminant at 11:04 AM on January 5, 2009

Once the 1099-C is issued, that means the other company is writing off the debt as uncollectible. Is a write-off in your best interest?
Also is your company insovent? If you are insolvent, it may not be taxable depending on the circumstances. There is an "Insolvency exclusion." You are insolvent when, and to the extent, your liabilities exceed the fair market value of your assets. So it is possible none of your forgiven debt is taxable or it is possible that all or only a portion of it is counted as income.
There's a lot to this. Call your tax preparer. This is going to be coming up more and more often this year and next (and I hope not ad infinitum).
posted by readery at 11:19 AM on January 5, 2009

I can't speak on the specifics your asking about but I feel obliged to say be very, very careful.

Debt collection is so much NOT about who rightfully owes what, the legality or illegality of whatever, but about social engineering. It's probably best that avoid the collector as much as possible and seek proper counsel or at least find resources in your area that can help with your decisions.
posted by ezekieldas at 11:22 AM on January 5, 2009

I originally wrote a bunch of stuff about how it's debt collection's job to be a jerk right back at you, making your life as miserable as possible and make you panic about calls to the IRS and do anything to make them leave you alone. But I deleted all that to focus on the important bit:

If you're hiring contractors and you don't have an accountant taking care of your taxes and taking your panicky calls then you're being foolish. It's a business imperative to have one at this point. They pay for themselves damn quickly and will help keep you out of positions where you've got people going to collections and threatening you with the IRS.
posted by Ookseer at 11:23 AM on January 5, 2009

If a debt is written off for an individual, they have to pay income tax because they received something of value.

For a company, I don't see that a written off debt matters. They pay tax on the difference between income and expenses. An unpaid bill reduces their expenses, and is automatically reflected on the books for tax purposes. Any actual tax expert is welcome to correct me on this. I think they're either screwing with you, or stupid. I'd ignore it, and I'd get tougher with the vendor about resolving the issue.
posted by theora55 at 7:45 AM on January 6, 2009

I'm assuming the company that the debt is owed to uses the accrual method of accounting, so the debt has already be realized as income on their books, thus the write-off and tax issue.
But it also may just be collector's double talk - anything to get the debt paid. As said above the less said to a collector the better and this issue should be turned over to the person that prepares the taxes.
posted by readery at 10:36 AM on January 6, 2009