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Forgiven Debt Can Create A Tax Liability – How to Avoid

Posted by Michael S. Anderson | May 28, 2013 | 0 Comments

There are a number of Americans attempting to work out a deal with their creditors right now. One thing many of them don't realize, is that when the creditor makes the deal and forgives a portion of the debt, the portion forgiven, is reported to the IRS on a 1099-c.  The forgiven debt reported is than treated as income and may be taxable.

If some of your debt is forgiven as a result of this forgiven debt, you should receive a copy of the form 1099-c “cancellation of debt” from the creditor as well.   Unfortunately, the problem doesn't not go away if the creditor fails to send the form to you and only sends it to the IRS.

You should report this forgiven debt on your income tax return and pay tax on it unless:

1.  You were insolvent

If you were insolvent i.e. your liabilities exceeded the fair market value of your assets at the time the debt was forgiven, the forgiven portion shouldn't be counted as income.

2.  You filed for bankruptcy

If you filed for bankruptcy before the debt was forgiven, the 1099-c is issued to your bankruptcy estate and therefore not taxable to you.

3.  If you qualify under the Mortgage Forgiveness Act of 2007

If the forgiven debt was a result of a home foreclosure, the  Mortgage Forgiveness Act of 2007 may apply to you.

If you have received a 1099-c read the IRS form 982. Use this form to calculate your insolvency or attach a detailed letter. Work through IRS publication 4681 if you think you are involsent as well, as it contains instructions and a worksheet.

Better yet, find someone qualified to help you.

About the Author

Michael S. Anderson

Michael Anderson has been representing Arizona clients with tax debt problems for two decades and has helped his clients eliminate millions of dollars in tax debt. His tax debt practice is limited to helping individuals and the self-employed who have serious IRS problems.


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