Do not file Form 1099-C when fraudulent debt is canceled due to identity theft. Form 1099-C is to be used only for cancellations of debts for which the debtor actually incurred the underlying debt. File Form 1099-C, Cancellation of Debt, for each debtor for whom you canceled a debt owed to you of $600 or more if:

• You are an entity described under Who Must File
• An identifiable event has occurred. It does not matter whether the actual cancellation is on or before the date of the identifiable event.
• Form 1099-C must be filed regardless of whether the debtor is required to report the debt as income.
• The debtor may be an individual, corporation, partnership, trust, estate, association, or company.
• Do not combine multiple cancellations of a debt to determine whether you meet the $600 reporting requirement unless the separate cancellations are under a plan to evade the Form 1099-C requirements.

If, in the same calendar year, you cancel a debt of $600 or more in connection with a foreclosure or abandonment of secured property, it is not necessary to file both Form 1099-A, Acquisition or Abandonment of Secured Property, and Form 1099-C for the same debtor. You may file Form 1099-C only. You will meet your Form 1099-A filing requirement for the debtor by completing boxes 4, 5, and 7 on Form 1099-C. However, you may file both Forms 1099-A and 1099-C; if you do file both forms, do not complete boxes 4, 5, or 7 on Form 1099-C. See the instructions for Form 1099-A, earlier, and Box 4, Box 5, and Box 7, later.

File Form 1099-C if you are:

• A financial institution described in section 581 or 591(a) (such as a domestic bank, trust company, building and loan or savings and loan association).
• A credit union.
• Any of the following, its successor, or subunit of one of the following:
  • Federal Deposit Insurance Corporation,
  • Resolution Trust Corporation,
  • National Credit Union Administration,
  • Any other federal executive agency, including government corporations,
  • Any military department,
  • U.S. Postal Service, or
• A corporation that is a subsidiary of a financial institution or credit union, but only if, because of your affiliation, you are subject to supervision and examination by a federal or state regulatory agency.
• A Federal Government agency including:
  • A department,
  • An agency,
  • A court or court administrative office, or
  • An instrumentality in the judicial or legislative branch of the government.
• Any organization whose significant trade or business is the lending of money, such as a finance company or credit card company (whether or not affiliated with a financial institution). The lending of money is a significant trade or business if money is lent on a regular and continuing basis.

You are not required to report on Form 1099-C the following.

• Certain bankruptcies. You are not required to report a debt discharged in bankruptcy unless you know from information included in your books and records that the debt was incurred for business or investment purposes. If you are required to report a business or investment debt discharged in bankruptcy, report it for the later of:
  • The year in which the amount of discharged debt first can be determined, or
  • The year in which the debt is discharged in bankruptcy.

  A debt is incurred for business if it is incurred in connection with the conduct of any trade or business other than the trade or business of performing services as an employee. A debt is incurred for investment if it is incurred to purchase property held for investment (as defined in section 163(d)(5)).

• Interest. You are not required to report interest. However, if you choose to report interest as part of the canceled debt in box 2, you must show the interest separately in box 3.
• Non principal amounts. Non principal amounts include penalties, fines, fees, and administrative costs. For a lending transaction, you are not required to report any amount other than stated principal. A lending transaction occurs when a lender loans money to, or makes advances on behalf of, a borrower (including revolving credit and lines of credit). For a non lending transaction, non principal amounts are included in the debt. However, until further guidance is issued, no penalties will be imposed for failure to report these amounts in non lending transactions.
• Foreign debtors. Until further guidance is issued, no penalty will apply if a financial institution does not file Form 1099-C for a debt canceled by its foreign branch or foreign office for a foreign debtor, provided all the following apply.
  • The financial institution is engaged in the active conduct of a banking or similar business outside the United States
  • The branch or office is a permanent place of business that is regularly maintained, occupied, and used to carry on a banking or similar financial business.
  • The business is conducted by at least one employee of the branch or office who is regularly in attendance at the place of business during normal working hours.
  • The indebtedness is extended outside the United States by the branch or office in connection with that trade or business.
  • The financial institution does not know or have reason to know that the debtor is a U.S. person.
• Related parties. Generally, a creditor is not required to file Form 1099-C for the deemed cancellation of a debt that occurs when the creditor acquires the debt of a related debtor, becomes related to the debtor, or transfers the debt to another creditor related to the debtor. However, if the transfer to a related party by the creditor was for the purpose of avoiding the Form 1099-C requirements, Form 1099-C is required.
• Release of a debtor. You are not required to file Form 1099-C if you release one of the debtors on a debt as long as the remaining debtors are liable for the full unpaid amount.
• Guarantor or surety. You are not required to file Form 1099-C for a guarantor or surety. A guarantor is not a debtor for purposes of filing Form 1099-C even if demand for payment is made to the guarantor.
• Seller financing. Organizations whose principal trade or business is the sale of non-financial goods or non-financial services, and who extend credit to customers in connection with the purchase of those non-financial goods and non-financial services, are not considered to have a significant trade or business of lending money, with respect to the credit extended in connection with the purchase of those goods or services, for reporting discharge of indebtedness on Form 1099-C. But the reporting applies if a separate financing subsidiary of the retailer extends the credit to the retailer's customers.

For more information visit: http://www.irs.gov/instructions/i1099b/ar02.html