Cancellation of Debt

Today TaxMama hears from Anna in Virginia who is upset. “I just received a letter from the IRS for my 2007 tax return saying I owe $1600 because of a cancellation of debt that I didn’t claim. I didn’t know that I was supposed to. I don’t have $1600. What am I supposed to do?”

TaxMama answers a question on Tax

Dear Anna,

Don’t you just hate those notices from out of the blue?

Or are they really unexpected?

You probably got a 1099-C from the lender who cancelled your debt. You didn’t really know what to do with it, so you didn’t include it in your tax return. You really should have asked someone.

After all, if you owe about $1600, how could you not know that you managed to get let off of about $10,000 worth of debt? You had to do something to get that debt cancelled, didn’t you?

So, what should you do now?

Take that IRS notice to a good local tax professional who understands how to handle cancellation of debt income. You might be able to file an amended return to reduce the taxability of that cancelled debt.

There is some information here about how all this works:
https://www.marketwatch.com/story/debt-cancelation-feels-good-until-tax-bill-comes

If there’s no way to reduce the taxes, you’ll simply have to request an installment payment plan. You can do that online without any help. https://www.irs.gov/businesses/small/article/0,,id=108347,00.html

Good luck!

And remember, you can find answers to all kinds of questions about 1099-Cs and other tax issues, free. Where? Where else? At TaxMama.com.

[Note: If you were subscribed to the e-mailed TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the subscribe link and join us.]

File Download (0:00 min / 0 MB)

Leave a Reply