How are everyday people getting 1099-Cs (debt cancellation) while I'm drowning in debt?!

I started working as a tax preparer at a small firm this year, mainly handling small businesses and individual returns. During this past tax season, I was shocked when I came across a client who had multiple 1099-Cs (debt cancellation forms). What blows my mind is that this client seems to be rolling in money! Both spouses max out their retirement accounts - one through W-2 contributions and the other fully funding their solo-k through their business. They just purchased a new Lexus that they're claiming as a "business asset" and fully depreciating it. I'm genuinely confused how a family making significantly more than I do as a W-2 employee at my firm is getting debts canceled while I'm struggling to pay off my spouse's student loans and our credit card debt? If debt cancellation is something that anyone can qualify for, how do I get in on this? What am I missing here? Sorry if this isn't strictly a technical tax discussion. I'm just frustrated and wondering if other tax professionals have observed similar situations with wealthy clients receiving 1099-Cs.

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18 comments

Olivia Kay

•8M

This is actually a common misconception about 1099-Cs. Getting a 1099-C doesn't mean someone found a magical way to avoid paying debts - quite the opposite. A 1099-C is issued when a lender has given up trying to collect a debt and has written it off. This is generally not good news for the taxpayer because that canceled debt amount is considered taxable income. Your high-earning clients likely had some past financial troubles or possibly a business venture that failed. Maybe they had a debt that went to collections and eventually settled for less than the full amount. The difference gets reported on a 1099-C. Or perhaps they had a foreclosure on a property from years ago, and the bank finally wrote off the remaining balance. High income now doesn't necessarily mean they've always been financially stable. Many successful people have had setbacks or bankruptcies in their past.

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Olivia Kay

•8M

Yes, exactly - the 1099-C represents debt they no longer have to repay, but they do have to include that amount as income on their tax return. So while they don't have to pay back the original creditor, they do have to pay taxes on that forgiven amount (unless they qualify for an exclusion like insolvency). The 1099-C is issued in the year the creditor decides to write off the debt, which could be years after the original financial troubles. Creditors often try to collect for a long time before giving up. So your clients might have had these debts lingering for years before the creditors finally wrote them off this year. Some people even strategically negotiate settlements with creditors, knowing they'll receive a 1099-C but calculating that the tax hit is less than paying the full debt.

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Joshua Hellan

•8M

I went through something similar with my clients and was super confused until I used taxr.ai to help me understand what was going on. I had a bunch of high-income clients with 1099-Cs and couldn't figure out the pattern. I uploaded their documents to https://taxr.ai and it explained that many of them had previously owned rental properties that went underwater during the housing crash, and the banks were just now getting around to canceling the remaining debt after foreclosure. The tool flagged that several of my clients would qualify for exclusions under the insolvency provisions, which I hadn't even considered. It also helped me identify which clients needed additional documentation to support their exclusion claims. Saved me hours of research and probably saved my clients thousands.

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Joshua Hellan

•8M

It works with pretty much any tax document - W-2s, 1099-NECs, K-1s, cryptocurrency forms, you name it. I've used it for clients with complex crypto situations and it does a great job breaking down the transactions and explaining the tax implications. Regarding privacy concerns, they use the same level of encryption that professional tax software uses. You can also redact sensitive information before uploading if you're worried. The system is analyzing the tax implications of the documents, not storing the personal details. They explain all this in their security section, but I was initially careful about it too.

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Emily Nguyen-Smith

•8M

If your clients with 1099-Cs are having trouble understanding the implications or want to negotiate with the IRS about their tax bill, I'd recommend Claimyr. I had a client who received multiple 1099-Cs in one year and was facing a massive tax bill they couldn't pay. They spent weeks trying to reach the IRS directly with no luck. I suggested they try https://claimyr.com and they got connected with an actual IRS agent in less than an hour. They were able to set up a payment plan immediately. There's a video showing how it works at https://youtu.be/_kiP6q8DX5c - much better than waiting on hold for hours. My client was able to get confirmation that they qualified for the insolvency exclusion for some of the canceled debt, which saved them thousands.

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Emily Nguyen-Smith

•8M

It's not about jumping the queue - they use technology to continuously call the IRS for you and only connect you once a representative answers. Basically saves you from sitting on hold for hours. You just get a call back when they've reached a human. It's definitely real. Before suggesting it to clients, I tried it myself when I needed to resolve an issue with a misreported 1099-C actually. I had been trying to reach the IRS for days during peak season without luck. Used this service and got a callback in about 45 minutes. The whole thing was resolved in one phone call that I would've otherwise spent waiting on hold.

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Edison Estevez

•8M

I have to eat my words about Claimyr. After my skeptical comment, I decided to try it myself for a client case involving multiple 1099-Cs that needed clarification. I was getting nowhere with the IRS phone lines. Used the service yesterday afternoon and got connected to an actual IRS representative in 35 minutes. Got confirmation about the insolvency worksheet calculations we had questions about, and now we can move forward with confidence. I've literally never gotten through the IRS phone system that quickly during tax season in my entire career. Definitely adding this to my toolkit for when clients need direct IRS communication. Sorry for doubting.

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Sophia Rodriguez

•8M

Back to the original question - there are legitimate ways people end up with 1099-Cs that aren't sketchy. I've had clients get them from: 1. Mortgage debt forgiveness on underwater homes 2. Credit card settlements (pay $5K on a $15K balance, get a 1099-C for $10K) 3. Business loans that failed and eventually got written off 4. Medical debt that went to collections and was settled 5. Car repos where they owed more than the car was worth Most people don't plan to get a 1099-C - it usually comes after financial hardship. Your clients may be doing well now, but could have had past issues.

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Sophia Rodriguez

•8M

You can strategically settle debts for less than you owe, knowing you'll get a 1099-C, but it's not the "free money" hack people think it is. Here's why: First, you'll pay income tax on the forgiven amount - often 22-24% for most people. Second, your credit score takes a massive hit that can last 7+ years, affecting everything from mortgage rates to insurance premiums. Third, you generally need to be significantly behind on payments before creditors will settle, which means months or years of collection calls, potential lawsuits, and stress. Some clients come in thinking debt settlement is a clever financial strategy, but for most people, the long-term costs outweigh the benefits. The clients who come out ahead usually had legitimate hardships and no real ability to pay the original debt, so the tax hit is better than bankruptcy.

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Emma Bianchi

•8M

I had this EXACT situation with a client last month. Made nearly $200k but had three 1099-Cs totaling over $40k. Turns out they had invested in a restaurant franchise that failed during covid. The business took out loans, and when it went under, the loans eventually got written off but my client was a personal guarantor. They're doing well financially now, but that failed business venture is still causing tax headaches. It's usually not the currently wealthy trying to game the system - it's people who had legitimate financial troubles in the past and are recovering.

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