Battling bad debt with 1099-C filings 

Every credit manager knows bad debt all too well. Mounting bad debt can send ripples throughout a company, as quarterly targets are missed, budgets tighten and meaningful investments are delayed as cash flow cramps.  

Why it matters: When it comes to seemingly uncollectible debts, credit managers can do more than write it off. Filing a 1099-C reports canceled debt to the IRS, which may treat the uncollected amount as taxable income—meaning the debtor may have to answer to the IRS. 

Filing a 1099-C allows creditors to cancel debts of $600 or more while remaining tax compliant. By canceling the debt, creditors are alerting the IRS to unpaid debts that can be taxable.  

“For accounts where traditional collection efforts have been exhausted, the 1099-C process provides a compliant way to report canceled debt, ensuring the customer remains responsible for any resulting tax obligation,” said Alaina Worden, CCE, credit and collections manager for CECO (Portland, OR). “If you send it to collections and they never respond to the collection agency, the agency can do nothing to help other than send it to legal. A 1099-C filing can help you handle those customers whom you otherwise would not want to spend additional money trying to recover debts from.” 

When pursuing a 1099-C against a customer, it is important that credit managers are compliant with federal standards. The IRS guidelines specify how canceled debts should be reported for tax purposes, with an emphasis on accuracy and completion. When filing a 1099-C, creditors will need to file Copy A with the IRS and send Copy B to the debtor to ensure they are properly reporting the incident. Errors or omissions in IRS filings can lead to penalties, so an accurate, thorough and complete report is crucial. If an error is found, credit managers should update the filings and notify the IRS and the customer. Additionally, there are state-specific standards for 1099-C forms, with some states requiring direct filing.  

Before creditors file their 1099-C, they should notify their customer that they will consider filing should the outstanding debt remain unpaid. Worden recommends credit managers develop distinct letters, from final opportunity to conditional forgiveness to debt forgiveness, in order to address specific customer circumstances. Letters should be transparent and avoid language that might confuse or mislead the customer, while providing clear explanations for any tax implications.  

“We use letters to inform customers ahead of time that if they don’t pay us, we may move forward with a 1099-C filing,” Worden said. “Because canceled debt may be considered taxable income, customers often seek resolution before the cancellation occurs.” 

It helps to have a clear process for customers to dispute or appeal the filings, keeping track of all communication and resolution between the creditor and the customer. Credit managers can also provide the customer with IRS resources for additional guidance.  

Compliance with the 1099-C process requires creditors to treat like-customers similarly. If one company’s payment habits are identical to another’s, a 1099-C would need to be filed against both. When building procedures within the credit department around 1099-C filings, it’s important to understand where bad debt exists in your portfolio. 

“Our organization is working to figure out what threshold would address where most of our bad debt falls,” Worden said. “We don’t want to put ourselves in a position where no one qualifies or where we have too many customers going through the 1099-C process. We are still looking to find that sweet spot and see what that looks like for us, which is difficult because the market is difficult.”  

The best way to ensure compliance is to create and enforce strict policies for the filings. “Make sure that you have some policies in place so that you are consistent with how you complete and file forms,” Worden said. “Compliance is important, so you don’t want to deviate from the policy. I would say make sure that anyone working on 1099-Cs within your department receives policy enforcement and staff training on a regular basis to make sure they are up to date on the IRS standards, state requirements and any new or updated provisions.” 

The bottom line: By building strong policies around 1099-C filings, credit managers can best address rising bad debt by systemically addressing those customers who would otherwise fall through the cracks. With a thorough understanding of state and federal requirements, continued communication with their customer and promptness in the face of deadlines, credit managers can swiftly address bad debt before it overtakes their receivables.