An individual’s credit card was stolen and the thief ran up a balance. He immediately reported the theft and was able to negotiate with the issuing bank to reimburse the charges made on his card by the thief. End of story right? Wrong!
The issuing bank was unable to recover the money; therefore it classified the amount they charged off as a cancellation of debt to the credit card holder. Because any forgiven amount over $600 must be reported to the IRS the bank sent a Form 1099-C (Cancellation of Debt) to the credit card owner in January of the following year. After lengthy verbal battles, the bank would not budge so he had to deal with reporting the reimbursed money as a cancellation of debt.
Most consumers are unaware that some banks may force theft victims to pay taxes on any money reimbursed. Remember if no money is recovered by the bank and depending on how the bank’s insurance works, the bank might be forced to report this amount of money to the IRS on the 1099-C Form. If this is the case, this must be reported as “other income” on an income tax return.
Under these circumstances Bonnie Lee, an enrolled agent with the IRS and the owner of Taxpertise in Sonoma, CA, recommends the forgiven amount be reported as described above then the same amount written off on the Schedule D as bad debt from theft. Her view is if the income is classified as debt, then let it show as a debt from the taxpayer’s standpoint as well. The logic is there just make sure all documentation is kept in case of an audit.
To avoid having to having to deal with a 1099-C Form if you are involved with a credit card theft and are able to negotiate the issuing bank reimburse the stolen money, make sure to contact the bank’s customer service or legal department to get the bank’s charge back policies in writing. Keep paper trails of all communications with the bank along with any police reports describing the theft. Armed with this information, if your tax return is audited your return will stand up in an audit. Hopefully, you never have a credit card stolen but if you do you are now forewarned!!
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