The question that often comes up this time of year is: Is it acceptable for creditors to report uncollected debt to the IRS as additional income through the issuance of form 1099?

The general answer is no it is not acceptable unless you are a secured creditor who has recovered your security and disposed of it for less then what is owed. To understand why the answer is no we must familiarize ourselves with the purpose of form 1099.

IRS Form 1099 has many purposes for reporting income and there is more then one Form 1099.

1099-A is used to report all amounts owed which are the result of the recovery or abandonment of property that is security for a debt for which you are the creditor.

1099-B is used to report all amounts from brokerage and barter exchange transactions.

1099-DIV is used to report all dividends and capital gains of $10.00 or more.

1099-G is used for government payments. $10.00 or more for unemployment compensation and state and local income tax refunds. $600.00 or more for taxable grants and discharge of indebtedness in bankruptcy.

1099-INT is used for reporting all interest income in excess of $10.00.

1099-MISC is used to report miscellaneous income. Royalty payments exceeding $10.00. Rent, prizes or awards in excess of $600.00. Payments to any non-employee of a business, i.e. contract labor, subcontractors, directors in excess of $600.00. "Golden Parachute" payments made in excess of $600.00 or the proceeds of crop insurance in excess of $600.00.

1099-R is used to report all amounts paid from retirement, profit sharing, IRAs, SEPs or 401(K) and 403(C) programs.

1099-S is used to report all gross receipts from the sale or exchange of real estate.

There are other 1099 forms for other sources of income as well. As you can see the form 1099 is used to report additional or miscellaneous income. The sale of goods or services is not meant to be reported as income to the customer but rather as income for the seller of goods/services which is then subtracted from the cost of those goods or services to obtain gross profit. If we were to report unpaid debts as income we would first have to reverse the sale. In so doing there would be no account receivable and therefore no bad debt write off.

Who then would benefit from the use of form 1099? Why the customer of course. We would have no bad debt write off expense to reduce our taxable income. Ask yourself this question; Would I rather pay a $10,000 dollar invoice or the tax on $10,000? I think the answer is rather obvious.

If you are a secured creditor and you either repossess or the debtor abandons the security and you sell the security for less then what is owed against it. You may report the difference between what is owed and what you sold the security for on the form 1099-A. This is generally the only time a trade creditor may utilize the form 1099.

For further information I suggest you contact your local office of the IRS and ask for the publication that deals with form 1099 or speak with your Chief Financial Officer.

I wish you well.