Internal Revenue Service United States Department of the Treasury
Level Basic Advanced Military International

Cancellation of Debt (COD)

Summary and Exercises

Summary

Cancellation of Debt is an optional specialty training for volunteers with an Advanced Certification. A separate certification is required for volunteers on cancellation of debt issues. A debt includes any indebtedness for which a taxpayer is liable or which attaches to the taxpayer’s property. Cancellation of indebtedness can involve auto loans, credit card debt, medical care, professional services, installment purchases of furniture or other personal property, mortgages, and home equity loans.

Cancellation of debt can be complex. VITA/TCE volunteers may assist a taxpayer with issues related to cancellation of debt as long as the taxpayer meets all the criteria for discharge of qualified principal residence indebtedness or if all debt canceled and reported on Form 1099-C was nonbusiness credit card debt.

Taxpayers who go through a foreclosure or abandonment of their principal residence receive Form 1099-A, Acquisition or Abandonment of Secured Property. Form 1099-A will have information needed to determine the gain or loss due to the foreclosure or abandonment.

If the debt on the principal residence is canceled, the taxpayer will receive Form 1099-C, Cancellation of Debt. If foreclosure/abandonment and debt cancellation occur in the same calendar year, the lender may issue only Form 1099-C, including the information that would be reported on Form 1099-A.

If a taxpayer receives Form 1099-C for canceled credit card debt and was solvent immediately before the debt was canceled, all the canceled debt will be included on Form 1040, line 21, Other Income.

Use Publication 4731, Screening Sheet for Foreclosures/Abandonments and Cancellation of Debt, which provides questions and step-by-step guidance to determine whether the cancellation of debt issue is within scope for the VITA/TCE programs.

  • Use Part I for taxpayers with Form 1099-A for a foreclosure or abandonment of their principal residence.
  • Use Part II for taxpayers with Form 1099-C, and/or Forms 1099-A and 1099-C resulting from cancellation of debt on a home mortgage loan.
  • Use Part III for taxpayers with Form 1099-C resulting from cancellation of credit card debt.