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All that box 5 means is that the company has no recourse to collect the debt from you. In other words, they cannot take your house or car or bank accounts or other assets to pay off the bill.
You will still need to report the amount shown in box 2 as taxable income on your tax return. You may be able to exclude this from your taxable income if you can show that you were insolvent. Insolvent means that your liabilities were more than your assets.
To exclude the canceled debt from your income using the insolvency exclusion, file form 982 with your tax return and attach a statement showing the total value of all your assets and your debts at the time this occurred. If your debts exceed your assets by at least the same amount as the canceled debt, then you will not have to pay tax on this amount.
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Thank you Sharon
The credit card company that I did the settlement told me that they accepted it as payment in full and that no 1099-C would be issued. Does the IRS ever accept a payment plan
I am sorry to tell you that the company gave you incorrect information. Any time that a lender writes off a portion of a debt that you owe, they are required by law to send you a 1099-C form. That is not something that is left up to their discretion. So they were obviously just telling you this in an effort to get you to pay something on the bill.
The IRS does set up payment plans for taxpayers who cannot afford to pay the taxes they owe. But I would first see if you can maybe qualify to exclude this from your income by showing that you were insolvent at the time this happened. If you cannot show that, then you could set up a payment plan with the IRS.
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