I am assuming this canceled debt is from credit cards or other loans not related to a foreclosure on your primary residence. If that is the case, the only way you can exclude these from being part of your taxable income is if you can show that you were insolvent at the time these debt cancellations occurred or if you have the debts discharged through bankruptcy. There just are not other options.
If you file your return without including the income reported on these forms, it will only worsen your situation, as the IRS receives copies of those forms and will be looking for you to report that income on your return. If you do not report it on your own, you will eventually receive a notice from the IRS of the additional tax amount that is due, and there will also be interest and penalties assessed due to the late reporting.
I suggest that if you cannot afford to pay the taxes that are due on this amount that you apply to set up an installment payment plan with the IRS to pay off this debt over a period of time.
I honestly wish I could give you more options here, but unfortunately, insolvency or bankruptcy are your only choices for not paying tax on this canceled debt.
Thank you Aggie
Box 5 of that form has absolutely nothing to do with your tax liability on this canceled debt. That is just for informational purposes to indicate the type of loan that it was. In other words, when it says you were not liable for the debt, that means that the lender had no collateral or other recourse where he could come after you personally to collect the amount you owed. It was simply an unsecured loan.
But anytime that a lender gives you money or advances credit to you, and you do not pay back the full amount of that loan or the credit that was extended, then the IRS views that the same as if you had income. Someone gave you the use of a credit card or a loan, and you used that loan or credit card to make purchases. But then you did not pay back the full amount. That is why it is viewed in the same manner as if you had income. Someone gave you money which you did not repay.
You cannot deduct the interest or any of the other fees that accrued on the account, because you agreed to pay those when you signed up for the credit card or the loan.
The form 982 is what you would use if you want to claim insolvency or if you have the debts discharged through bankruptcy. But you cannot just fill out form 982 without one of those two things applying to your situation.
I really would love to be able to help you here, but unfortunately there is just no way around this situation other than showing you were insolvent or by having the debts discharged through bankruptcy. With the economy being the way it is right now, we have had many people come through this forum with similar problems, so I know that there are a lot of people going through this same dilemma right now. And unfortunately there just are no other choices here.
Hello again Aggie,
Believe me, if there were any way around this legally I would be the first to tell you what that was. I would much rather give people news that makes them happy rather then telling them they must pay tax on something like this. But unfortunately I am not the one who writes or enforces the tax regulations, so the best I can do here is to tell you what your legal options are.
You may ignore the 1099 forms if you really wish to do that, but keep in mind what I said earlier, because the IRS will most definitely end up contacting you at some point about the omission, and then the tax debt will be even higher due to interest and penalties which the IRS will impose. Because of that, it may be better for you to just go ahead and report them now and then try to set up the payment plan to get these taxes paid over a period of time.
Thanks Aggie, and I do wish you the best of luck here in getting this resolved at some point.