IRS Form 1099-C: How to Avoid Taxes on Forgiven or Canceled Debt

Have you received a 1099-C Cancellation of Debt Form from the IRS? If you have, you are probably a little confused. Not many people know that the IRS considers debt forgiveness as a source of income. You could call it a debt forgiveness tax. Yes, if you are lucky enough to get a creditor to forgive or cancel a debt, the IRS considers the “forgiven debt” as taxable income.

Getting your debt canceled is still great news, but it’s important to understand the tax implications. For that, you’ll need to get familiar with Form 1099-C.

Do you owe taxes on your discharged debt? Just because you got a 1099-C form doesn’t mean you owe debt forgiveness tax. The answer depends on your circumstances. Read on to learn:

  • What the 1099-C form is.
  • When to file the 1099-C.
  • The exclusions and exceptions that may relieve you of your tax liability.
  • What to do when you receive a 1099-C.

What is form 1099-C, Cancellation of Debt?

If your debt is forgiven or settled for less than the full amount of what you owe, the lender will report this to the IRS as lost income. The IRS views this as earned income that should be taxed. If the forgiven or settled debt is worth $600 or more, the lender must send you and the IRS a Form 1099-C at the end of the tax year. This form is for reporting income when you file your taxes for the tax year in which your creditors forgave your debt. The IRS will expect you to report that amount as income.

Even if you don’t receive a Form 1099-C from the lender, it’s likely that they sent one to the IRS. So whether you get one or not, you’re responsible for reporting the forgiven or settled amount. Failure to comply could result in a tax bill, or audit notice from the IRS. Incurring penalties and fees increase your taxes and can push you deeper into debt.

IRS 1099-C form download

If this applies to you, you’ll receive a 1099-C form in the mail. While there are exclusions and exceptions, this is the general rule. Each year, about 4 million 1099-C forms are filed.

Have you received a form or letter from the IRS that you don’t completely understand? Check our comprehensive guide to IRS letters and notices.

When do you have to pay debt forgiveness tax?

Do you have to pay taxes on a discharged debt?

If you received a 1099-C form, your discharged debt is considered taxable income unless you qualify for an exclusion or exception. Note that exceptions apply before the exclusions.


If your debt was discharged under the following circumstances, you won’t have to pay taxes on it.

  • The debt was canceled as a gift, bequest, devise, or inheritance.
  • Payment of the debt would have been a deductible expense.
  • The price of a property was reduced by the seller after the purchase.
  • Forgiveness/cancellation of certain student loan debt. However, not all student loan forgiveness programs are tax-exempt — make sure to read the fine print of your arrangement.
  • Reductions of a home mortgage’s principal balance due to Pay-for-Performance Success Payments under the Home Affordable Modification Program.


After applying all exceptions, you may still be able to exclude canceled debt in the following situations:

  • The debt was canceled as part of a title 11 bankruptcy.
  • Insolvency occurred immediately before the cancellation of the debt (in other words, your debt was worth more than your assets).
  • Qualified farm indebtedness, real property business indebtedness, or principal residence indebtedness.

If you end up excluding canceled debt from your income, you’ll need to fill out Form 982 to reduce certain tax attributes by the amount you’ll exclude. A tax professional can come in handy here.

If you need to know more about exceptions and exclusions, read IRS Publication 4681.

How much debt has been canceled?

According to the latest data released by the IRS, $89.6 billion in canceled debt have been claimed since 2007 (source). As you can see in the graph below, the number of forms submitted and the amount of debt canceled increased substantially in the years after the 2008 financial crisis. There has been a decline since 2011 but we are still well above 2008 levels. Cancelation of debt IRS statistics

Who must file 1099-C?

Generally, any “applicable financial entity” who cancels a debt of $600 or more must file a 1099-C when an “identifiable event” occurs.

What is an applicable financial entity?

‘Applicable financial entities’ include:

  • Financial institutions (banks, trust companies, building and loan associations, and savings and loan associations).
  • Credit unions.
  • Corporate subsidiaries of financial institutions or credit unions.
  • Federal government agencies.
  • Lending organizations (e.g. credit card companies, finance companies, etc.).
  • Federal executive agencies, their successors or subunits (e.g. Federal Deposit Insurance Corporation (FDIC), The Resolution Trust Corporation (RTC), The National Credit Union Administration (NCUA), etc.).

In short, it’s almost any institution that extends loans or lines of credit.

What is an identifiable event?

According to the IRS, “identifiable events” include:

  • Debt discharged in a title 11 bankruptcy.
  • Other judicial debt relief.
  • Expiration of the statute of limitations on a debt.
  • Expiration of the deficiency period on a debt.
  • Foreclosure election.
  • Debt relief from probate or a similar proceeding.
  • Cancellation by agreement.
  • A decision or policy to discontinue collection efforts.
  • Another type of discharge before an identifiable event.

To illustrate, here are some examples of situations which require the filing of a 1099-C form:

  • A debtor charges $1,000 to a credit card and then stops paying. The credit card company discharges the debt and closes the account.
  • A debtor can’t repay a personal loan of $5,000 and agrees with the creditor to pay a $2,000 lump sum to settle the debt. The account is closed and $3,000 is discharged.
  • A borrower lost their job and can’t afford their car payments. Their vehicle is repossessed and sold at an auction for 65% of the remaining balance. The creditor discharges the difference between what is owed and what is recovered.

In these cases, the applicable financial institution must file the 1099-C for the amount of debt that was canceled.

What happens if you don’t file a 1099-C?

If a creditor accidentally fails to file Form 1099-C, they’ll face a penalty.

If a debtor receives a 1099-C and fails to report the qualifying amount as income on their taxes, they’ll likely receive notices from the IRS about an income discrepancy. This can lead to IRS interest charges, penalties, and even an audit.

How does a 1099-C affect your credit?

Form 1099-C has no direct impact on your credit report because it’s credit bureaus don’t see it. Only the IRS and the debtor in question receive the form.

However, the creditor who files the 1099-C will usually report your default and discharged debt directly to the credit bureaus. This negative mark can remain on your credit report for up to seven years.

Debt settlements and your credit

The average American has $38,000 in debt. Whether you’re overwhelmed with credit card debt or medical bills, there are debt relief firms that negotiate a debt settlement with lenders, so you can pay less than the original amount.

However, this practice can impact your credit because you’re not making consistent—if any—payments to lenders while the firm is negotiating a settlement. According to the Federal Trade Commission (FTC), lenders can still charge you late penalties and fees during this process. And there are no guarantees that they’ll reach an agreement with the firm, which means more debt and a damaged credit score for you. If you do reach an agreement, this can stay on your credit report for seven years. A damaged credit score paired with a blemished credit report can affect your ability to borrow money in the future.

What to do if you receive a 1099-C form

If you receive a 1099-C form, here’s what to do.

First, make sure that all of the information is correct. Did you have a debt discharged in the amount stated?

If so, it’s time to pursue any applicable exclusions or exceptions. Figuring out if you qualify for an exception can get complicated so consdier enlisting the aid of a competent tax professional. This can ensure that you don’t pay more than you have to.

A tax professional will help you find out how much you can reduce your taxable income or if you can avoid paying taxes on your canceled debt altogether. There are two ways you can avoid paying taxes on canceled debt, by claiming exceptions and exclusions.

Exceptions to reporting taxable income

The IRS may consider forgiven debt as income but it’s not all taxable income. According to the IRS, the following circumstances may exempt you from reporting income when you file your taxes (source).

  • Amounts canceled as gifts, bequests, or inheritance.
  • Certain qualified student loans canceled under the loan provisions that the loans would be canceled if you work for a certain period of time in certain professions for a broad class of employers.
  • Certain other education loan repayment or loan forgiveness programs to help provide health services in certain areas.
  • Amounts of canceled debt that would be deductible if you, as a cash basis taxpayer, paid it.
  • A qualified purchase price reduction given by the seller of property to the buyer.
  • Any Pay-for-Performance Success Payments that reduce the principal balance of your home mortgage under the Home Affordable Modification Program.
  • Amounts from student loans discharged on the account of death or total and permanent disability of the student.

If your canceled debt meets these requirements, you don’t have to include it in your income.

Exclusions from gross income

Even if your canceled debt does not qualify for an IRS exception, you may still be able to reduce or remove your tax liability by claiming one of these exclusions.

  • Debt canceled in a Title 11 bankruptcy case.
  • Debt canceled during insolvency.
  • Qualified farm indebtedness.
  • Cancellation of qualified real property business indebtedness.
  • Qualified principal residence indebtedness that is discharged subject to an arrangement that is entered into and evidenced in writing before January 1, 2018.

If you fall under one or more of these exceptions, you’re required to reduce certain tax attributes by completing a Form 982. Complete it and attach it to your tax return. For further assistance, consult a qualified tax professional.

Once you’ve applied all exclusions and exceptions, does some or all of your canceled debt still remain? Then that amount is considered taxable income. In other words, you’ll have to include that amount on your tax return as “other income” and pay taxes on it.

Need help hunting for exclusions?

Once taxes begin to get complicated, it can be helpful to have an expert in tax law on your side. Tax firms have experience with 1099-C forms and other issues that may arise. They can ensure that you file everything properly. And if an issue comes up down the road, they can also represent you in dealings with the IRS. Not sure where to start? Review and compare leading tax firms here.

What if you already paid taxes on canceled debt you could have excluded?

If you are just now realizing you could have claimed exceptions or exclusions on canceled debt income, there is still hope. You can amend previous tax returns and claim a refund for up to three years.

This is what you need to do. Although at this stage it is a good idea to hire a tax professional.

  • First, collect all the documents you used to file the tax return you want to amend. You don’t want to trigger an audit by creating a discrepancy in your reported income.
  • Second, download all the tax forms you need. These include IRS Form 1040X, Form 982 and Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments.
  • Complete the forms and amend your tax return with Form 1040X. Amended returns can’t be e-filed so you will need to go old-school. Print and mail the documents and mail the paperwork to the address assigned to your state.

If you live in

Mail Form 1040X and attachments to:

Florida, Louisiana, Mississippi,
Department of the Treasury
Internal Revenue Service
Austin, TX 73301-0052
Alaska, Arizona, Arkansas,
California, Colorado, Hawaii,
Idaho, Illinois, Indiana, Iowa,
Kansas, Michigan, Minnesota,
Montana, Nebraska, Nevada, New
Mexico, North Dakota, Ohio,
Oklahoma, Oregon, South Dakota,
Utah, Washington, Wisconsin,
Department of the Treasury
Internal Revenue Service
Fresno, CA 93888-0422
Alabama, Connecticut, Delaware,
District of Columbia, Georgia,
Kentucky, Maine, Maryland,
Massachusetts, Missouri, New
Hampshire, New Jersey, New
York, North Carolina,
Pennsylvania, Rhode Island,
South Carolina, Tennessee,
Vermont, Virginia, West Virginia
Department of the Treasury
Internal Revenue Service
Kansas City, MO 64999-0052
A foreign country, U.S. possession
or territory*; or use an APO or FPO
address, or file Form 2555,
2555-EZ, or 4563; or are a
dual-status alien
Department of the Treasury
Internal Revenue Service
Austin, TX 73301-0215