Had settlement with creditor but now have trouble with IRS

[Avenger83]

What is the name of your state?PA

Two years ago I had a creditor that I entered into a settlement agreement to pay off an outstanding debt. The original debt was for $9,653, and the creditor agreed in writing to accept a 40% payment of $3911 to settle the debt in full. Payment was made. Now two years later, I recieve a form CP2000 from the IRS stating that this creditor filed a Cancellation of Debt with them in the amount of $4131. The IRS has adjusted my 2003 tax return to show this $4131 as unclaimed income, and are taxing me $658. I was under the assumption that when a debt was SETTLED, that that would be it. How can the creditor settle with me and then on top of that write it off as "Canceled"? Any help would be greatly appreciated!

 

[seniorjudge]

What is the name of your state?PA

Two years ago I had a creditor that I entered into a settlement agreement to pay off an outstanding debt. The original debt was for $9,653, and the creditor agreed in writing to accept a 40% payment of $3911 to settle the debt in full. Payment was made. Now two years later, I recieve a form CP2000 from the IRS stating that this creditor filed a Cancellation of Debt with them in the amount of $4131. The IRS has adjusted my 2003 tax return to show this $4131 as unclaimed income, and are taxing me $658. I was under the assumption that when a debt was SETTLED, that that would be it. How can the creditor settle with me and then on top of that write it off as "Canceled"? Any help would be greatly appreciated!

Q: How can the creditor settle with me and then on top of that write it off as "Canceled"?

A: When the creditor settled with you, then you got that money as income and now have to pay taxes on it.

 

[Avenger83]

I can almost understand the logic behind this, but I also "Settled" with ten other creditors at the same time (sold my house to pay everyone "off"), and none of the other ten have filed anything (that I am aware of). Are the other ten creditors in the wrong by not filing?

 

[seniorjudge]

I can almost understand the logic behind this, but I also "Settled" with ten other creditors at the same time (sold my house to pay everyone "off"), and none of the other ten have filed anything (that I am aware of). Are the other ten creditors in the wrong by not filing?

Q: Are the other ten creditors in the wrong by not filing?

A: Not that I am aware of, but, then again, I am no tax expert.

 

[Avenger83]

Thanks to all for their advise. Knowing what I know now, I would have done things much differently. I was in the process of trying to buy a new home through the VA. The mortgage lender that I was dealing with told me to negotiate settlements with all of my creditors (since they were all in default, and actually past the SOL). I sold my existing home, and contacted each of the 11 creditors, worked a settlement amount with them, and paid them with the proceeds of the sale of my home. Nothing was ever said by anyone that I would be responsibe for the difference in the total and what was negotiated. I even called the mortgage person this morning, and she said that she has delt with hundreds if not thousands of other Settlements, and has NEVER heard of this, so I just wanted to make sure that there wasn't something amiss in what this creditor was doing. I never recieved anything in the way of a 1099 or any other notice, except the IRS CP2000 which gives me 30 days to pay up.

 

[seniorjudge]

Thanks to all for their advise. Knowing what I know now, I would have done things much differently. I was in the process of trying to buy a new home through the VA. The mortgage lender that I was dealing with told me to negotiate settlements with all of my creditors (since they were all in default, and actually past the SOL). I sold my existing home, and contacted each of the 11 creditors, worked a settlement amount with them, and paid them with the proceeds of the sale of my home. Nothing was ever said by anyone that I would be responsibe for the difference in the total and what was negotiated. I even called the mortgage person this morning, and she said that she has delt with hundreds if not thousands of other Settlements, and has NEVER heard of this, so I just wanted to make sure that there wasn't something amiss in what this creditor was doing. I never recieved anything in the way of a 1099 or any other notice, except the IRS CP2000 which gives me 30 days to pay up.

I even called the mortgage person this morning, and she said that she has delt with hundreds if not thousands of other Settlements, and has NEVER heard of this, so I just wanted to make sure that there wasn't something amiss in what this creditor was doing.

Tell mortgage person she needs to try to keep up, hear?

 

[Snipes5]

If you were insolvent at the time, you need not pay the tax.

Take your original return, you IRS notice, and proof of insolvency if you have it, to an Enrolled Agent and let them help you sort it out.

They may also be able to examine your return and find something you missed as far as deductions, perhaps making it so you don't owe as much.

Snipes