Who can or must file a Form 1099-C?

• Author: Scuotto, Anthony, III

Even with the economy starting to turn up a little, taxpayers and businesses are still defaulting on credit and loans. In this environment, tax advisers may consider whether their clients should issue a Form 1099-C, Cancellation of Debt, for a bad debt. A situation may arise where a client wants to ensure the forgiven debtor reports the income from the canceled obligation.

The Form 1099-C instructions identify who must issue the form. The list includes financial institutions, credit unions, and organizations whose significant trade or business is the lending of money. Can someone other than the above issue a Form 1099-C for an uncollectible amount? This item considers this question as well as other Form 1099-C issues.

IRS Service Center Advice (SCA) 1998-020 addressed whether "an individual or entity not required to file a Form 1099-C under Section 6050P of the Internal Revenue Code [may] nevertheless voluntarily file the form." SCA 1998-020 discusses Sec. 6050P, what information needs to be filed with the Form 1099-C, and what constitutes an identifiable event. The memorandum states that,

While the requirement to report discharges of indebtedness applies only to the entities described above, there is no specific prohibition in the Internal Revenue Code or the Income Tax Regulations that forbids the reporting of discharges of indebtedness by entities not required to report. Such reporting may encourage voluntary tax compliance and proper gross income inclusions. The timing of the filing of the Form 1099-C for entities who are not required to file is important as well. SCA 1998-020 cautions that an entity that is not required to report should not issue a Form 1099-C unless there is either a discharge of indebtedness or a specific identifiable event described in the regulations. The memo states that the collection of a debt after filing a Form 1099-C "ought to occur...