Filing IRS Form 1099-C as a 'non-applicable entity' for someone else is not necessarily fraud - John R. Dundon II, Enrolled Agent
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Filing IRS Form 1099-C as a ‘non-applicable entity’ for someone else is not necessarily fraud

Filing IRS Form 1099-C as a ‘non-applicable entity’ for someone else is not necessarily fraud

During 2002 and 2003, Mary allowed her daughter Susan and son-in-law Robert to charge $30,238 on her American Express account. Dumb Ass! As predicted and on queue, the couple divorced and could no longer make payments for their charges to the account.

At Mary’s request, an understanding was arrived at whereby she would make payments on the card and pay the balance in full and Robert would pay her back. Mary repeatedly tried to collect the unpaid debt allegedly owed to her by Robert, but to no avail. Thus, in December 2006 she canceled the uncollectible debt and filed a Form 1099-C, Cancellation of Debt, with her 2006 tax return. She imputed the entire debt to Robert, reported nothing to her daughter, and claimed a nonbusiness bad debt deduction in the form of a short-term capital loss on her Schedule D (Form 1040).

Robert filed suit claiming that the Form 1099-C issued by Mary for the alleged charges is false and fraudulent because she is not an “applicable entity” that is required to file an information return. Therefore, she is prohibited from filing Form 1099-C, and the fraudulent filing is actionable per se under §7434.

An information return must be filed under §6050P when any applicable entity discharges $600 or more of indebtedness. An applicable entity is a governmental agency, a financial institution, or other organization in the business of lending money. Hayes is not an applicable entity, so she is not required to file Form 1099-C.

However, the limited issue for decision in this case is whether a non-applicable entity is permitted or forbidden to file Form 1099-C. There is no binding, on-point legal authority. However, Service Center Advice 1998-020 concludes that “individuals or entities not required by §6050P to file Form 1099-C may nevertheless voluntarily file such forms in appropriate circumstances.” Nothing specifically prohibits an individual from filing Form 1099-C if such individual cancels a bona fide, uncollectible debt and takes a bad debt deduction under §166(d).

It is hard to say such an individual willfully filed a fraudulent information return. In addition, there is no reason to prohibit a non-applicable entity from filing a Form 1099-C, provided it is truthful and accurate. In fact, this may encourage debtors to properly include it in gross income.

Lastly, Mary testified that her daughter told her that she was required to issue a IRS Form 1099-C in order to take a bad debt deduction. This tends to indicate that she filed a Form 1099-C in error, not fraudulently.

Thus, the Court ruled that the filing of a Form 1099-C by someone other than an applicable entity is not fraudulent or actionable per se under §7434. Robert cannot prove fraud merely by providing that Mary filed a Form 1099-C in which she claimed to discharge Robert’s alleged debt. Whether Hayes filed an intentionally false, erroneous, or fraudulent return in any other respect is left for a jury to decide.