According to the IRS, if you went to a Corinthian school and had your loans canceled under the borrower defense rule, you should not owe taxes on the canceled amount. Unfortunately, we have learned that the Department of Education and its servicers sent IRS forms 1099-C to Corinthian students whose loans were canceled in 2016.
This has caused a lot of confusion for these borrowers. Few taxpayers know how to handle a 1099-C even when it is properly issued but it is even harder when it is not. To make matters worse, most free tax sites will not help with 1099-C issues. As we blogged about last month, a forgiven student loan is usually treated as income for tax purposes. However, there are a number of exceptions to this rule.
Fortunately the IRS instructed the Department of Education not to send the 1099-Cs for these types of borrowers next year. In particular, the IRS officially stated that former Corinthian students whose loans are discharged through a borrower defense to repayment WILL NOT owe taxes as a result.
In the meantime, we have heard that the Department has submitted a list of impacted borrowers to the IRS. The IRS has said that these borrowers will not be audited for failing to include the 1099-C amount when they file their taxes. We hope that the Department will send guidance to affected borrowers, but have not yet seen it. .
Bottom line for former Corinthian students:
- If you received a 1099-C from your student loan servicer as a result of a discharge of student loans taken to attend a Corinthian school AND have NOT yet filed your taxes, the IRS has told us that it is safe to ignore the 1099-C. Keep it in your records but you do not need to include it in your tax filing. If you use a tax professional, make sure that they are aware of the IRS’s position on this debt.
- If you do for some reason get a letter from the IRS about your taxes, DO NOT ignore it. Contact a tax professional. There are low-income tax clinics that may be able to help in these circumstances. Be prepared to explain the situation in order to prevent an audit.
- Unfortunately, people who have already filed and included the 1099-C amount as income will likely need to file an amended return to avoid being improperly taxed on that amount.
A better solution is needed: Although the most recent IRS guidance should help in the future, it is limited to discharged loans for attendance at just two school chains—Corinthian (including Everest, Heald, and Wyotech programs) and American Career Institutes (“ACI”). The Department of Education has received borrower defense applications from borrowers who attended many other schools. Under the disputed debt doctrine, it is unlikely that the debt that is forgiven as a result of any successful borrower defense claim should be taxable. But again, few borrowers will have the resources to sort that out. A better, long-term solution is needed.
