These recent recession has resulted in a huge rise in credit card debts. Many people find themselves in a position where they are unable to pay these debts and find that other than declaring bankruptcy, their only alternative is to negotiate with the credit card companies and try and get them to forgive a part of their debt. Many credit card companies are willing to forgive a portion of the debt and settle for a lesser amount so they can still recover some of the money you owe and in most cases still make a slight profit.

If you do negotiate with the credit card company and get them to forgive a portion of the debt that you owe, and if the forgiven amount is more than $600 then the credit card company will send you a 1099-C form which you need to file with your tax return The IRS considers this forgiven amount as income you have received and deems it taxable. By law the IRS requires creditors and debt collectors who have agreed to accept $600 or more as a forgiven amount towards a debt they are owed by consumers to file form 1099-C, which is notice of cancellation of debt with the IRS and issue a notice of the same to the person they have negotiated the debt reduction with.

Many times the Credit card company or debt collectors send these 1099-C forms after you have successfully negotiated and settled the debt. Since you have no more obligations to these companies you may trash any further contact you have from these companies.

But you need to file the 1099-C along with your 1040 tax form as the IRS has the copy of the 1099-C from your debt collector or credit card company. Not filing this form along with your returns may cause unnecessary hardships in the form of a tax audit, fines and penalties.

If you have negotiated a credit card debt it is advisable to make a note of it immediately and notify your tax preparer of the amount you have gotten reduced and see that the amount is included in your tax form as other income.