Cancelled Debt

Today TaxMama hears from Sean from TaxMama’s Tax Parlor who tells us a very long story. Please read the whole question in the Tax Parlor. But, for short…, “My current situation involves a repossession of a car back in 1994. I received a notice about a year ago from the IRS stating that I owed around $1000 more than I reportedly earned in 2003. The IRS stated the income resulted from a “forgiveness of debt” which originated from the repossession. It turns out Wells Fargo bought my debt from the old bank and issued the 1099-C when they wrote it off in 2003. My attorney and CPA disagree on the handling of this case. What are my options?”

Hi Sott,

I’ve gone through the long explanation of how cancellation of debt works in my answer in the Tax Parlor. But, while writing the answer, I had a brilliant idea to clear up this whole assessment.

The car was repossessed in 1994. The debt was extinguished in 1994. The 1099-C should have been filed THEN. And Wells Fargo may be barred from issuing that 1099 this late in the game. Just because they need to clean up the sloppy books of the bank they bought, is no reason for them to assess you for a loan that should have been written off over a decade ago.

And that’s what I would have your attorney or CPA argue with respect to this assessment. That’s a pretty solid argument.

And remember, you can find answers to all kinds of questions about cancellation of debt and all kinds of other tax issues, free. Where? Where else? At TaxMama.com

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