If the original creditor writes off $10,0000 and the debt buyer purchases the debt several years later for, say, $200 (this is an example only), then the 1099 from the debt purchaser can only be for the $200. Is that correct? Otherwise the debt buyer is over-collecting their investment.
The amount a debt buyer pays for rights to a debt is irrelevant. The taxable amount is based on your ascension to income. In your example, $10,000.
Actually, if you know you're not going to pay the debt, you're supposed to report it as income even if you never receved a 1099. My sense is most people won't report the income unless they do get a 1099. Kind of like running a stop sign and not getting caught. How many people are going to turn themselves in and ask for a ticket?
If the debt is past the SOL, can a 1099 still be issued?
There are 8 identifiable events in the tax code under which a 1099-c is required to be issued. One of those identifiable events is the running of a debts limitations period. From the Internal Revenue Code Sec. 1.6050P-1(b)(2)(i)(C)
A cancellation or extinguishment of an indebtedness upon the expiration of the statute of limitations for collection of an indebtedness, subject to the limitations described in paragraph (b)(2)(ii) of this section, or upon the expiration of a statutory period for filing a claim or commencing a deficiency judgment proceeding;
(ii) Statute of limitations. In the case of an expiration of the statute of limitations for collection of an indebtedness, an identifiable event occurs under paragraph (b)(2)(i)(C) of this section only if, and at such time as, a debtor's affirmative statute of limitations defense is upheld in a final judgment or decision of a judicial proceeding, and the period for appealing the judgment or decision has expired.
As you can see, the identifiable event an expired limitations period only occurs upon adjudication of the matter using the SOL as a defense in court, and then only after the appeals period has expired.
For some reason I thought only the original creditor could issue a 1099. I see all kinds of problems allowing debt buyers to issue one, especially when they pass the debt from collector to collector several times over.
The new laws became effective in 2006. That's when the IRS clarified its definition of a "financial institution" to include debt buyers. There are a number of cases available involving creditors and the issuance of 1099's.
If the money that was the debt has now been considered income, then it can no longer be a debt, correct?
also, if as you say the debt that became income can still be a debt, how could it ever be claimed as income? Income is income and debt is debt.
You are trying to engage me in a semantics game and I don't have time for that. I know where you are going. You are trying to argue that once the taxes have been paid, the debt no longer exists and thus the creditor has no right to collect. Right?
As I explained in my first responsive post, the answer is that the issuance of the 1099c and payment of taxes does not in and of itself extinguish the debtor's liability for payment.
I know this is convoluted and a new concept to you. Please don't fuss with me about it. I did not make it up. Take it up with your congressweasel if you don't like it.
Logically? Unless it is mandatory and the amount repaid can be deducted from the taxpayers income, then what happens is the taxpayer pays taxes on the money as income AND the still must repay the money but not be allowed to use it as a deduction.
I use the phrase "logically" because that is to me the logical sequence of events. By using that language I am implying that I have no specific knowledge of the internal procedures of a creditor nor have I been party to any of the communication between the IRS and 1099 reporters (I am sure that it is all available on the IRS website).
It is certainly not logical that a taxpayer would pay taxes on the income and then not be allowed some sort of deduction or offset if he later paid the debt.
But, I think I said all that. I can't tell if you are expressing frustration or chastising me for not knowing exactly how it is handled by the IRS.
So, is there any mandatory and regulatory requirements for such actions? If not, then THAT is an unfair taking.
I don't think I said that. But, yes the tax code is quite explicit for when the 1099c must be issued.
As a debt collector, have you or your company ever issued a 1099 for such a debt and by chance has any money evre been paid back on an account that you had issued a 1099 for? Did you issue some sort of correction 1099 to reflect the amount repaid?
I would not have any specific information how debt collectors are handling this. I am not in that business. My hands on experience with 1099s was in the banking business some years ago and some consulting work I occasionally do for banks.
I do know that corrected 1099s are not unusual. The IRS publishes extensive guidelines for reporters to use.
I will say that many debt buyers are probably unclear on the new laws. One of my acquaintances in the debt buying business outlined for me an interesting problem they were trying to figure out.
If a creditor fails to issue a 1099-c upon an identifiable event, their maximum fine under the new law is $50.00
If they issue a fraudulent 1099-c, the law provides the 1099-c recipient with a private right of action, with statutory penalties of $5,000.00.
I see a whole new can of worms here where the creditor and recipient fight over the "proper amount" of the 1099c. If the debtor were to take the position that 1099-c issued was fraudulent as to the amount … what would be the outcome? Does the debt buyer take their chances with the IRS for $50, or with the debtor for $5,000? Does the debtor file a lawsuit for a declaratory judgment to get a definitive answer? Is it a tax court question?
And I can see a particularly nasty fuss where the debt buyer failed or refused to validate a debt. In that case, my expectation is that debt buyers will just validate the debt with the minimum plain language requirement of the FDCPA (name and address of the original creditor). But, as we know there is a hard-core group of debtors who refuse to accept that definition. That is the making of legal action. Anytime one gets in court the odds of success are generally about 50/50. How will it turn out? I don’t have a clue except that it sure will be a can of worms.
