The Internal Revenue Service (IRS) rarely makes life easy. This is particularly true for those who are able to negotiate with a credit card company about an outstanding debt. In some cases, a successful negotiation can result in a dismissal of the debt. Although the consumer may no longer need to pay off the bill with the credit card company or other lender, his or her financial woes are far from over.
This is when the financial woes shift to matters involving the IRS. In the eyes of this federal agency, the deal noted above results in a gain for the consumer. The IRS views this as a financial benefit to the consumer and expects the consumer to list the benefit as income on his or her tax returns.
When does the IRS consider forgiven debt income? The creditor will send the consumer a 1099-C. This tax form is required whenever the company agrees to accept an amount that is at least $600 less than the balance due.
How common is this? Fairly common. A recent publication by credit card specialists estimates that over 4 million taxpayers receive these forms annually.
What if I fail to report the forgiven debt? Those who receive a 1099-C Form are required to report the income on their tax returns. A failure to do so can result in an audit as well as additional penalties and fines.
Those who are the subject of an audit have options. An attorney experienced in these matters can provide counsel and a customized plan help better ensure your interests are protected.