Returned Check Losses -Are they 1099C reportable?

Question:

If the loss involves a check should a 1099C Cancellation of debt be used? I was advised by a Tax Consultant that the 1099C should be used for customers losses due to overdrafts and deposited checks returned.

Answer:

Under the UCC, a payee is obligated to pick up a returned check he has endorsed. Also, a customer is required to reimburse an overdraft he has created. Characterizing either unsatisfied commitment as a "debt" is not unreasonable, given the way the IRS defines the term for 1099C reporting: A debt is any amount owed to you including stated principal, stated interest, fees, penalties, administrative costs, and fines. The amount of debt canceled may be all or only part of the total. However, for a lending transaction, you are required to report only the stated principal.

However, it is the cancellation of the debt that makes it reportable - 1099C instructions list 8 different circumstances where a debt may be cancelled. I can't ratify the suggestion you were given to "...report them all and let the IRS sort them out."

My suggestion is that you review the instructions and evaluate each obligation separately.

Normally, filing a 1099C does not extinguish the underlying debt; if a debt is still enforceable under state law, filing an information return required by federal law does not change that. However, under circumstances where the law does not literally require filing, you certainly give the other party a basis for saying he does not owe you the money should you ever attempt to collect it in the future.

First published on BankersOnline.com 4/01/02