Before you settle a debt with one of your creditors, you should understand the tax consequences. When a creditor writes-off a portion of your debt, the Internal Revenue Service (IRS) will treat the forgiven debt as income. In other words, you may owe taxes on the amount that was written off!
When the creditor writes off debt and declares it to be uncollectible to the IRS, it is reported as lost income and the creditor’s tax burden is reduced. The IRS still wants to recover the tax on this money, so it looks to you for payment. Since you no longer have to pay the money owed to your creditor, the IRS considers it to be gained income and it is considered in calculating your income taxes. For a consumer that is not expecting to be taxed on forgiven debt, it can be a devastating shock!
If a financial institution forgives debt in the amount of $600 or more, it must provide you with IRS Form 1099-C. This form is used to report income, so the IRS will make sure that you report the forgiven debt as income on the 1099-C form when you file your tax return for the year.
If you do not receive a Form 1099-C from your creditor, it is still possible the creditor submitted one to the IRS. Thus, if you do not report the forgiven debt as income on your tax return and the creditor has turned the information over to the IRS, it could result in you getting a tax bill or an audit notice which could end up costing you more in interest and fines.
If you are considering settling debt with a creditor for less than the full amount owed, it is essential to get legal help. We can not only help you negotiate with your creditor, but also make sure you understand what your potential tax liabilities may be.
Take the first step to resolving your debt problems today by contacting us for a FREE initial consultation. The attorneys at Fitzgerald Campbell represent debtors all over the State of California in debt settlement, collections harassment and credit card lawsuits. If you have a matter relating to a debt you owe, contact us today by calling (844) 431-3851 for a consultation.