My Charge-Off Sent to the IRS

unhappy elderly woman looking at bills.
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A charge-off usually happens after you’ve been delinquent on a debt for 180 days or six months. It is the credit card issuer's way of taking a loss on the debt. In their accounting documents, they’ve written the account off as uncollectible, and they no longer consider the debt as an asset. Creditors can continue collecting on a charge-off until you pay, even though it's been charged off.

Canceled Charge-Off

In some circumstances, the creditor may decide to cancel the debt completely. When this happens, you no longer have a responsibility to pay the debt. While you may be relieved to be free from this obligation, you may not be in the clear yet. The canceled debt may now become an issue to hash out with the IRS.

When creditors cancel debts, they are required to report the canceled amount (if it's over $600) to the IRS using Form 1099-C cancellation of debt. You'll also receive a copy of the form in the mail, typically around tax time if it applies. You may not have personally encountered this tax situation before, but it's pretty common. The IRS estimates nearly 4 million 1099-C forms will be sent to taxpayers in 2021.

The 1099-C Cancellation of Debt Form will come from the creditor or debt collector so don't toss it under the assumption you're done dealing with that debt.

The IRS considers any canceled or forgiven debt as income. Like income from other sources, like your job or business, you’re required to report income from a canceled debt on your tax return for that year. Though you never actually received any extra money, a canceled debt does result in a change to your net worth. The additional "income" from your canceled debt could increase your tax liability, resulting in a smaller income tax refund or even a tax bill.

Because the creditor has sent a copy of the cancellation of debt form to the IRS, the IRS is expecting you to include the amount on your tax return. Failing to include the amount may cause your return to be rejected or you may receive a bill from the IRS. If you receive the cancellation form after you've already filed your taxes, you may need to amend your tax return.

Depending on your income, tax bracket, filing status, and other tax factors, the canceled debt may only affect your taxes minimally. You may not have to pay the full amount of the cancellation to the IRS.

Settled Charge-Offs

You’re also required to include canceled debt on your taxes when a charge-off is settled because the creditor cancels a portion of the debt in the settlement offer. A settlement is when you negotiate with the creditor to pay just a percentage of the outstanding balance to satisfy the full debt.


You may be able to get an exception for including the canceled debt as taxable income on your tax return. One such exception pertains to insolvency. If you were insolvent, meaning you had a negative net worth, at the time the debt was canceled, you might not have to report all or part of the charge-off to the IRS.

To claim the insolvency exemption, you must file IRS Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness. For this, you'll need to have a list of your assets and liabilities at the time the debt was canceled. If you've already paid taxes on the canceled debt and later realize you qualified for the exception, you may be able to file an amended tax return to receive a refund of your overpayment.

Also note that there are certain other exceptions for bankruptcy, student loan debt, and farm and business real estate debt. For more information, you can visit the IRS website to view the rules and instructions related to the cancellation of debt.

Student loan debt that is forgiven between Jan. 1, 2021, and Dec. 31, 2025, will not require income tax to be paid on it, according to provisions in the American Rescue Plan Act.

Get a Tax Preparer Involved

It's always in your best interest to seek the help of a tax professional, especially when you're dealing with unfamiliar tax situations and forms. The tax preparer can help ensure your taxes are filed correctly whether that means including the canceled debt as income or filing for the insolvency exception.

You don't want to be the tax preparer's guinea pig. When you're choosing a tax professional, ask if they have experience working with taxpayers who've had to file a 1099-C Form or claim an insolvency exception. You want to have an experienced tax professional help with your taxes.

Article Sources

  1. Discover Credit Resource Center. "What is a Credit Card Charge Off,"

  2. Internal Revenue Service. "2021 Instructions for Forms 1099-A and 1099-C," Page 1.

  3. Internal Revenue Service. "Publication 6961 Calendar Year Projections of Information and Withholding Documents for the United States and IRS Campuses," Page 3.

  4. Internal Revenue Service. "Topic No. 431 Canceled Debt – Is It Taxable or Not?"

  5. Experian. "What is Net Worth?,"

  6. Internal Revenue Service. "Common Penalties for Individuals."

  7. Internal Revenue Service. "What Taxpayers Should Know About Amending a Return,"

  8. Federal Trade Commission Consumer Information. "Settling Credit Card Debt,"

  9. Internal Revenue Service. "Topic No. 431 Canceled Debt—Is It Taxable or Not,"

  10. "The American Rescue Plan Act of 2021," Page 182.