US Tax Court the ports collection agency tactic of filing IRS form 1099-C for cancellation of indebtedness income. One technique used by many collection agencies is to threaten a debtor that if they do not make a payment the debt will be reported as “canceled”. This means the person will have to pay taxes to the IRS and their state income taxes on the alleged amount of money due.
In the case of Stewart v. Commissioner an astute taxpayer fought this 1099-C technique.The taxpayer owed a credit card debt to MBNA bank and stop paying on it in 1994. The bank charged off this debt in 1996. In 2007, the bank sold the debt to a collection agency called Portfolio Recovery Associates. When the taxpayer said the debt was charged off and refuse to pay anything, the collection agency threatened him with filing a cancellation of debt with the IRS.
The taxpayer fought this case in Tax Court and won. The Tax Court determined that the debt had been written off long before the collection agency acquired it and therefore the taxpayer did not owe tax by the collection agency’s tactics