Failed to file a 1099-C . . Now what?
October 20, 2008 2:46 PM   Subscribe

I just noticed that my student loan lender posted $230 of reportable income (in 2007) to my account - something about a 1099-C form. I didn't report this on my 2007 taxes - should I be worried? Is there a way to correct it?

I've always been current on all of my loans, so, to my knowledge, none of my loans were "forgiven". I'm not quite sure why they've posted $230 of reportable interest to my account. Does anyone have experience with failing to file a 1099-C? Do I need to correct this?
posted by charlesroper to Work & Money (8 answers total)
See this link.
posted by JayRwv at 3:15 PM on October 20, 2008

If I've understood you correctly, that isn't reportable income, it's reportable interest. Student loan interest can qualify as a reduction of your gross income, reducing your tax liability. See here for a short discussion.

Your terminology is somewhat confusing, and I'm not entirely convinced it's accurate, so for a definitive answer, you'll need to specify exactly which form you received and what item on the form the $230 is reported as. Both will make a difference.
posted by valkyryn at 3:20 PM on October 20, 2008

@ valkyryn

That is incorrect. I know it's confusing, but I am talking about reportable income for my student loan. (I also claim the interest as a deduction, but that is irrelevant).

Here's a limited screen shot of my account.

Basically, I'm wondering if this small amount is worth worrying about.
posted by charlesroper at 3:31 PM on October 20, 2008

I AM NOT A TAX PROFESSIONAL. I have no license. I have no training. I have no qualifications. This post contains my mere layman's understanding, which could easily be severely mistaken, and it might be wise to ignore it completely.

The way to correct a mistaken 1040 is via a 1040X. You can download a 1040X, and the instructions, from the IRS website.

You might be technically liable for three things:
  1. The taxes due on this money itself
  2. Interest on that amount, accumulated since the time that you were supposed to have paid it
  3. Penalty for not paying it on time

In cases like this, where it's clearly not your fault and where you're self-reporting the mistake, the IRS will often waive the interest and penalty, meaning that you only will be responsible for the tax that you should have paid in the first place.

The 1040X itself only calculates the actual tax you should have paid in the first place, not the interest or penalty (the IRS will figure those out themselves). So, when you submit the 1040X, write a check for the amount that it shows, and include a cover letter politely and clearly explaining the circumstances, and saying something along these lines:

"I understand that I may be charged additional interest and penalties. Please note that, in my opinion, the circumstances described above were a mistake which was out of my control, and also that I am attempting to rectify this situation in good faith. I would therefore appreciate if you would waive any further interest or penalty charges. Thank you."

I AM NOT A TAX PROFESSIONAL. I have no license. I have no training. I have no qualifications. This post contains my mere layman's understanding, which could easily be severely mistaken, and it might be wise to ignore it completely.
posted by Flunkie at 4:30 PM on October 20, 2008

Call up the lender to clarify why it was issued, but there's a good chance it's not a mistake. Congress created some new reporting requirements that went into effect in the last couple of years. I forget the details, but essentially they're forcing lenders to file 1099-c a lot more readily than previously -- including for things that neither party would consider to be debt cancellation. Yeegads did some branch of govt bureacracy apply that term too loosely.

You'll get a bill from the IRS eventually, but you'd be better off taking care of it now. Tick tock on that back interest, baby...

Getting a surprise bill from the IRS is not nearly as much fun as you'd imagine. *icy fingers down the spine* I responded with a stack of documentation proving decisively that nothing had been cancelled. IRS's response over and over was the same: one a 1099 has been issued, evidence to the contrary is irrelevant (WTF!), so pay up.

Ahh, but there's a loophole. It turns out that you only owe tax on the the portion of the 1099-c "income" that exceeds your net worth. If you're like most Americans, good news! You have negative net worth! Your extra tax is $0! Yay, massive school debts! (It helps to look for a bright side).

The IRS adjustor proved unexpectedly helpful here. You basically just write up a super simple net worth statement. i.e. "Student loans: $100k. Car, clothes, and everything else: $2k." Check a box on Form 982, sign, and voila the tax bill is erased.

So don't sweat it, but do make a couple calls now to make this go away the easy way.
posted by nakedcodemonkey at 12:20 AM on October 21, 2008

@ nakedcodemonkey

I called up the lender yesterday. Apparently it was a "borrower benefit" that was credited to me after 6 on-time payments (refund of 1.5% of origination fee).

I have already filled out my amended return - but after reading your post, I don't think I'll mail it. Instead, I'll fill out and mail form 982 along with a form proving my insolvency.

What's the procedure for mailing that form 982 to the IRS? Do I just write a cover letter that says "Hey, add this to my 2007 return" along with form 982, a copy of my 1099-C, and the insolvency spreadsheet?

As I understand, if I'm filing form 982, my 1040 wouldn't change at all (because I wouldn't be listing that $236 on my 1040 as reportable income). So I don't need to file an amended return, right?
posted by charlesroper at 9:02 AM on October 21, 2008

That's my understanding, yep, but it's been a few years so (a) I may be forgetting important details and (b) things may have changed. Definitely confirm everything with IRS. That 1099 dept is seriously useful once you know form 982 exists. IRS doesn't go out of their way to advertise that option. Shocking, I know.

Now that I think of it, I may even have been advised that the net worth statement and a short cover letter would be sufficient. Seems like they said Form 982 was just the formal way to do the same. But again, you don't want to be taking my word for that...

Publication 908 has some instructions, though I didn't find it that readable. YMMV.
posted by nakedcodemonkey at 10:36 AM on October 21, 2008

P.S. Net worth is calculated as of the day of "cancellation", not what you're worth today or whenever you filed for '07. So you need to know exactly what day that 1099 was issued. It should say on there somewhere.
posted by nakedcodemonkey at 10:40 AM on October 21, 2008

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