Tax Court thwarts Collection Agency's use of 1099-C Cancellation of Debt
In the case of Stewart v. Commissioner an astute taxpayer fought this 1099-C technique.The taxpayer owed a credit card debt to MBNA bank and stop paying on it in 1994. The bank charged off this debt in 1996. In 2007, the bank sold the debt to a collection agency called Portfolio Recovery Associates. When the taxpayer said the debt was charged off and refuse to pay anything, the collection agency threatened him with filing a cancellation of debt with the IRS.
The taxpayer fought this case in Tax Court and won. The Tax Court determined that the debt had been written off long before the collection agency acquired it and therefore the taxpayer did not owe tax by the collection agency's tactics