Taxed for paying off a collection?

[laustimus]

What is the name of your state? Colorado

I just got a CP2000 from the IRS stating that I owe them over $3000 because of an item was missing from my tax forms.

In 2003 I paid off a collection of $11,500. I never got any forms from Wells Fargo (the bank I paid the loan off for) and I just filed my taxes as usual (1040 with standard deductions, no stocks or anything like that).

The IRS prints back that Wells notified the IRS that I paid off that loan, with 0 balance owed. Why is a collection so special?

Why do I owe taxes on a collection that I paid off in full?

[tdavidl]

based on what you describe it sounds like wells fargo reported to the irs COD income (cancellation of debt) menaing you owed them $11,500 & you didn't pay & they cancelled the debt.

maybe they went thru the cancellation process on their end & somewhere near the end of the process you made good.

if that's the case, then as long as you have proof that the debt was $11,500 & you can show that you satisfied the debt you shouldn't have to pay tax on it. write back to the irs with this proof & ask them to make the change. maybe you can call wells fargo & have them send you a letter that you did in fact satisfy the debt, that would help your case tremendously.

[Snipes5]

Also, how much was the actual debt? If the actual debt was $11500 and you paid the entire thing, you're fine, as tdavidl indicates above.

If, however, you "settled", and $11500 is merely what you paid, the amount over and above that amount, which was "forgiven" by Wells Fargo is cancelled debt, and must be reported.

Snipes

[laustimus]

Thanks for the replies guys, you were both correct.

Even though I paid off the debt Well still reported that year the CoD like you said. I guess it just took the IRS this long to get back to me

I talked to both parties, Wells is sending me a letter with my zero balance that I can just send back to the IRS. Guess I just freaked when I saw they wanted $3000 from me

Financially I am doing much better in my life then back then, but still, yikes

Again thanks guys you hit it right on the head.

[tdavidl]

i'm glad it worked out for you.

good luck !