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115 U.S Code §1681n Section of (FCRA)  

115 U.S Code §1681n Section of (FCRA) Summary​

1. Overview of 1099-C and Debt Cancellation

The IRS Form 1099-C (Cancellation of Debt) is used by creditors to report canceled or forgiven debts of $600 or more. When a debt is canceled, the IRS generally considers it taxable income to the borrower unless an exception or exclusion applies.

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Under 26 U.S. Code § 61(a)(12), the discharge of indebtedness is included in gross income. However, exceptions exist under 26 U.S. Code § 108, which allows for exclusions in certain circumstances.

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2. Key Tax Laws Governing 1099-C Debt Cancellation

The main tax laws regulating debt cancellation in the U.S. include:

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1. 26 U.S. Code § 61(a)(12) – Gross Income Defined

  • States that income from the discharge of indebtedness is generally included in a taxpayer’s gross income.

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2. 26 U.S. Code § 108 – Exclusion of Discharged Debt from Gross Income

Provides several situations where canceled debt is not taxable, including:

  • Bankruptcy (Title 11 cases)

  • Insolvency (if liabilities exceed assets)

  • Qualified farm indebtedness

  • Qualified real property business indebtedness

  • Student loan forgiveness (certain conditions apply)

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3. IRS Form 1099-C Reporting Requirements

  • Lenders, banks, credit unions, and certain other financial institutions must issue a 1099-C to the debtor and the IRS when $600 or more of a debt is forgiven.

  • The debtor must report the forgiven amount as income unless they qualify for an exclusion under § 108.

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4. Mortgage Debt Relief

  • The Mortgage Forgiveness Debt Relief Act of 2007 (extended through various laws, including the Consolidated Appropriations Act, 2021) allows certain canceled mortgage debt on a primary residence to be excluded from taxable income.

  • Covers up to $750,000 ($375,000 for married filing separately) for discharges through 2025.

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3. Special Considerations

  • State Tax Implications: Some states conform to federal tax treatment, while others treat canceled debt differently.

  • Exceptions for Non-Recourse Loans: If a non-recourse loan is canceled due to foreclosure, it may not be considered taxable income.

  • Disputing a 1099-C: If a taxpayer believes the form was issued in error, they can challenge it with the creditor or the IRS.

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4. Action Steps for Taxpayers

  • If you receive a 1099-C, determine whether an exclusion applies under § 108.

  • Use IRS Form 982 to claim exclusions for debt cancellation due to bankruptcy or insolvency.

  • Consult a tax professional for complex situations, such as multiple debt cancellations or state-specific rules.

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