If you’ve had a credit card charge-off or had another bank issued debt fall delinquent then you’re likely to be included in the millions of Americans that can expect to receive a love letter from the IRS.

The love letter will be entitled 1099-C. The “C” stands for Cancellation of Debt and any account that you’ve had with a bank (credit card, etc) that has fallen into the “collection” category is subject to a 1099-C from the IRS.

As many as 3 million customers can expect to receive a 1099-C for the 2011 tax year as the marriage between the banking industry and the government continues to provide painful results to the average American.

The premise behind a 1099-C is that the money you charged on the card, or otherwise had access to as a result of the relationship you had with a bank, is considered real income and therefore the IRS has the ability to charge you income tax on that amount. So the bank gets to write off the debt and receive tax benefits, you get the harmful reporting on your credit reports, and the IRS puts the screws to you on the back end for money you probably didn’t have to begin with. Sadly, THIS is the real American Dream for too many Americans.

Fortunately, there is a way you can minimize the impact of the 1099-C. If you can prove insolvency for all or part of the amount included in the 1099-C then that can eliminate some of your potential tax liability. Proving insolvency isn’t easy, especially with the convoluted IRS Form 982. But the simplest explanation for it is that insolvency, or solvency, is determined by your financial situation. You are insolvent to the extent that your liabilities exceed your assets and the point of insolvency is determined by the state of your financial position at the time the debts were forgiven by the creditor(s).

It’s important to do your research and find out all you need to know about proving insolvency if you’re the victim of a 1099-C. Whether you choose to seek out the help of a tax professional or seek the counseling of a company like ours, dealing properly with a 1099-C is an important step in the rebuilding of your credit scores.

It’s things like this that Pegasus Credit Repair helps you to work through and fully understand. To participate in the Pegasus Credit Repair program, visit us at http://www.pegasuscreditrepair.com/.

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