Portfolio Recovery Associates, LLC and other debt buyers have a potential tax loophole.

The original creditor of an alleged debt that cancels the debt must report the cancellation to the IRS on forms 1099-C and 1096. This alerts the IRS that the alleged debtor had “income” the amount of the canceled debt.

If the debt is low and the alleged debtor’s income is too low to require filing, this will be of no consequence to the alleged debtor. If the alleged debtor has enough income to require filing taxes, the write-off might create a tax burden for the debtor.

This is where the real fun starts. The original creditor can write off the bad debt, then sell the bad debt to a buyer like Portfolio Recovery for pennies on the dollar.

I am not an accountant. I am not a lawyer.

I am a thinker. And I think the debt buyer can write off the exact same debt as the original creditor. I think this because Portfolio Recovery has sent some alleged debtors a 1099-C.

I think it would be fair to limit the tax write-off to the amount paid for the unrecoverable debt, and then only if the debt is verifiable. There is an exemption if the debt is disputed. I have not found any code or caselaw limiting the write-off to the once taken by the original creditor.

If the debt buyer opts to write-off a debt, it is supposed to send a 1099-C to the debtor and to the IRS.

Portfolio Recovery Associates, LLC is a wholly owned subsidiary of PRA Group, Inc. PRA Group, Inc. has other debt buying subsidiaries.

Can Portfolio Recovery Associates, LLC “sell” its bad debts to a sister subsidiary? Can the sister subsidiary churn the bad debt through the IRS one more time? Is the alleged debtor responsible for paying tax on the canceled debt two, three or more times?

And what happens if the debt is disputed?

I am suing PRA, LLC for violations of the FDCPA, among other things. PRA, LLC said it decided to “waive” my alleged debt “in light of” the litigation. But, the goliath debt collector claims the stated debt was accurate before they magnanimously called it zero. PRA has no account level documentation of the alleged original debt. PRA knows the portfolio that had the debt listed was full of errors. It already reimbursed about $19M to other alleged debtors who naively gave money to Portfolio Recovery for similar alleged debt. But PRA literally swears under penalty of perjury that I had a debt of $2,297.63 that it bought from the original creditor and that it “waived” the debt.

But PRA told me, in writing, it has no intention to report the waiver to the IRS. Hmmm?

Debt collectors love to quote a case called Spokeo that says if a plaintiff did not suffer actual harm he does not have “standing” to sue over a statutory violation.

Does creation of a tax burden give the alleged debtor standing? I think so. That is why Portfolio Recovery Associates agreed it was not going to file a 1099-C about my “waived” debt.

What will PRA say to the IRS about its decision to waive debt without reporting the waived debt to Uncle Sam?

And when the IRS notices that debts are being churned to multiply the available write-offs, will it endeavor to close the loophole that is so profitable to Portfolio Recovery Associates, LLC?

I hope so.