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Lev, Tax Advisor
Category: Tax
Satisfied Customers: 29794
Experience:  Taxes, Immigration, Labor Relations
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I received a letter from the IRS stating that my taxable income

Resolved Question:

I received a letter from the IRS stating that my taxable income was adjusted because a debtor reported canceled debt and that I now owe over $1,000.00. I payed the debt off. When I originally filed my taxes I never claimed any reduction in first place regarding this debt or the amount I was paying every month to pay it off. If this amount is added to my taxable income total then they are taxing me on more than I made in 2010. My question is how do I respond to this letter? How can I be taxed on paying off a debt?

Thank you,

Submitted: 5 years ago.
Category: Tax
Expert:  Lev replied 5 years ago.

Hi and welcome to Just Answer!


If you negotiate with the creditor and all or part of the debt is forgiven or the debt would be canceled under bankruptcy protection procedure - you are sent the form 1099-C.

The amount of debt forgiven is reportable on 1099-C - - generally is taxable, unless any exemption apply -- you should file a form 982 - - to proof your exemption - and might exclude all or part of canceled debt from taxable income.

Which exclusion to use - depends on the type of your dent and specific qualification requirements.


If you paid the full debt off as you stated above - and there were nothing to forgive - that means - form 1099C was issued incorrectly.

In this case - you need to contact the lender and ask to correct form 1099C. Be sure to contact via certified mail - so if they refuse - you will have supporting documents that you tried to resolve the issue - and will file a formal complain with the IRS.

Let me know if you need any help.

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