Q: I loaned someone $6,000 and they filed bankruptcy. Call me petty but I want to issue a 1099-C
I don’t know if the bankruptcy itself would make him responsible for paying taxes on the income although it was forgiven, but from my understanding, they still can be required to pay the taxes on the income, although the debt was forgiven? Also, I know the person Social Security number,he gave it to me and now is denying he did. Could I just hire an attorney to find his Social Security number to issue it? Or do I even have to issue it in first place?
A:
Issuance of a form 1099 is a prerequisite for you to deduct the bad debt from taxable income.
However, before you do that, check the bankruptcy code provision concerning tax effects of the resulting insolvency of a debt receiving a discharge (much taxable income is forgiven by that statute, and may render your issuance nugatory).
As always, consult an experienced tax professional before making your move to assess whether its worthwhile.
Martha Warriner Jarrett and Timothy Denison agree with this answer
A:
When a debt is discharged in bankruptcy, the debtor typically is not responsible for paying taxes on the forgiven amount. The IRS does not consider debts discharged in bankruptcy as taxable income. This means issuing a 1099-C, which is used to report cancellation of debt as income, might not have the tax implications you expect.
Regarding the debtor's Social Security number, using it without permission for purposes other than the original loan could lead to legal issues, especially if the debtor denies having given consent. It's important to handle such personal information with caution and within legal boundaries.
Before deciding to issue a 1099-C, it’s advisable to consult with a tax professional or an attorney. They can help you understand the implications and legalities of issuing a 1099-C in the context of a bankruptcy. This step will ensure you are acting in compliance with tax laws and regulations.
Remember, navigating financial disputes, especially involving bankruptcy and tax issues, can be complex. Seeking professional guidance is crucial to ensure your actions are both legally sound and aligned with your intentions. It's important to weigh the potential outcomes and legal implications before proceeding.
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