Wrong Form 1099-C – Now What?

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wrong form 1099cForm 1099-As and Form 1099-Cs came back on tax preparer’s radar in 2006, 2007, 2008 when we saw people start to lose their properties to foreclosure, deed-in-lieu of foreclosure, short sale or, at least in the early years, had the principal amount reduced through loan modifications.

You get a Form 1099-A when a property is taken back by a lender.  A Form 1099-C is given to you when you have debt forgiveness. This debt forgiveness is called cancellation of debt (COD) and it is taxable. There are some exceptions but it’s up to you to tell the IRS about it. Your lender doesn’t need to determine if it’s taxable for you or not.

And since it’s tax time, that means there are Form 1099-Cs going out. We recently received a question on USTaxAid regarding a form that was received.

The question asks:

“If I received a 1099-c from a bank checking plus business account for $8,500 but the actual amount was for $5,000, can i deduct the $3500 as interest on a business loan?”

If the difference did relate to interest, than it would be a business deduction. That assumes that the debt was related to a business property.  If it was personal, you can’t take a deduction for the carrying cost on the debt.

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