Tax Question

[jojogomez]

What is the name of your state (only U.S. law)? New Mexico
Three years ago, my husband and I did a consolidation loan through our mortgage company. We were in way over our heads with credit cards and had gone through one of those bogus credit consolidation companies on the internet. Our credit was ruined and our mortgage company agreed to help us out. I had to negotiate with all of the credit card companies and come up with an amount they would take to settle our debt. I got from $2,000.00 to maybe $4,000.00 off on most of them. The mortgage company then gave us checks for each creditor to pay them off. I filed my taxes that year like normal. In late 2008, I started getting letters from the IRS saying that I had all of these debts written off and that I now owed the IRS an additional $5,000.00. Is this true? None of the debts were write offs - we settled with them for less amounts, but they were all paid. I need help on this. I don't have $5,000.00 and I am getting charged penalties and interest daily.What is the name of your state (only U.S. law)?

 

[irsos]

What is the name of your state (only U.S. law)? New Mexico
Three years ago, my husband and I did a consolidation loan through our mortgage company. We were in way over our heads with credit cards and had gone through one of those bogus credit consolidation companies on the internet. Our credit was ruined and our mortgage company agreed to help us out. I had to negotiate with all of the credit card companies and come up with an amount they would take to settle our debt. I got from $2,000.00 to maybe $4,000.00 off on most of them. The mortgage company then gave us checks for each creditor to pay them off. I filed my taxes that year like normal. In late 2008, I started getting letters from the IRS saying that I had all of these debts written off and that I now owed the IRS an additional $5,000.00. Is this true? None of the debts were write offs - we settled with them for less amounts, but they were all paid. I need help on this. I don't have $5,000.00 and I am getting charged penalties and interest daily.What is the name of your state (only U.S. law)?

It does not matter that they were not total writeoffs. Debt forgiveness is considered taxable income. You need to look into the relief provisions of Section 105. Basically, if all of your debts exceeded all of your assets at the time of the writeoffs - you can exclude that from income.

 

[tranquility]

I agree with irsos. Think about it. You borrowed a certain amount of money and paid back a lesser amount. Shouldn't the difference be considered "income" to you?

 

[jojogomez]

I don't agree that this was income. What was written off by creditors was only interest. As you know, on a credit card you can pay interest for years and never touch the principal. So, I felt we had paid way over what was originally owed by interest alone. That is all that was written off. I don't consider that income. Does that make sense?

 

[LdiJ]

I don't agree that this was income. What was written off by creditors was only interest. As you know, on a credit card you can pay interest for years and never touch the principal. So, I felt we had paid way over what was originally owed by interest alone. That is all that was written off. I don't consider that income. Does that make sense?

I understand your point of view, however, it may be income for tax purposes.

What happened was that you received 1099C's from each of the creditors that negotiated a lesser settlement with you. That does not however guarantee that the write-offs were income.

What you need to do is make a net worth statement as to how things stood at the time right before you negotiated the settlements.

All of your assets should be on one side of the page, and all of your liabilities on the other.
The fair market value of assets like a house or car go on the asset side, and any amount that you still owe on a mortgage or car loan goes on the liability side.

Then, take yourself to a tax professional and let them help you deal with the IRS. You may end up truly owing the 5000.00, or you may end up owing nothing, or you may end up owing an amount somewhere in between.

Do not however, just ignore the IRS. Get this handled ASAP.

I should also add that you can disagree until you are blue in the face, but the law is that any time a creditor agrees to accept less than the balance of an account, its cancelled debt income. Your only hope is to prove insolvency, because the amount you were insolvent is an allowable exclusion from cancelled debt income. That is why the net worth statement is so important.

The IRS also will make installment payment arrangements for any amount that you may eventually owe.