Irs 1099C??

Question

What the heck is this? Received one the other day regarding a car loan and credit card that I defaulted on 7 years ago. I voluntarily returned the vehicle to the bank and they auctioned it off. Done deal...or so I thought. Apparently, the irs considers it income even though it's been out of my posseion since 2000? They want $864 within 30 days. This sucks.

Thanks

Answer 1

When debt is cancelled, the amount is taxable income to you unless you are insolvent at the time.

Answer 2

If you discharged this debt in bankruptcy or are insolvent, the you can exclude some of this income by submitting a form 982.

See IRS publication 4681.

Answer 3

The 1099-C is a form for cancelled or forgiven debt.  The car was auctioned for less than what you owed on the loan.  Even though you returned the car, you still owed the portion of the loan that was not recovered by auctioning the car.  The bank could have sued you for it, but did not.  You continued to owe this money until recently.  The bank has essentially "given" you the money of theirs that you had, so you have to pay tax on it, just like you would if you had earned the money at a job and used it to pay the bank.

Answer 4

A 1099-C is a Cancellation of Debt.  Anytime you owe money and the lender quits requiring you to pay it back, what you owe has essentially been given to you, so you have to pay tax on that money that has been given to you.

When the bank auctioned off the old vehicle, they must not have gotten as much as you owed.  They applied what they got in the auction to your loan and you still had a balance.  Seven years later they gave up on ever seeing the money from you, so they issued a 1099-C explaining that the difference is essentially your profit from not having to pay them back what what they were shorted by not getting enough at the auction.  That profit is taxable and you also have seven years of IRS penalty and interest bringing it up to the $864.

That is why most of us think it would be a bad idea to buy a new car, change our minds, drive it back to the bank and say "never mind,  you can have it back".  Because if they can't sell it for what you owe, you have a taxable profit, as you have learned.

Answer 5

A 1099-C is use to report the Cancellation of Debt by a lender to the IRS so that they can take a deduction for the loss.  I am not sure why it took 7 years for this to have come to your attention.  I suspect that the IRS has sent you a number of notices about this issue in the past.  Of course you may never have received them for a number of reasons but they have found you now.