Cancellation of Debt Taxable Income Reporting

By | December 17, 2014

Publication 4681 is the reference for Canceled Debts, Foreclosures, Repossessions, and Abandonments for 2013.

Student Loan information begins on page 4, and exclusions for bankruptcy and insolvency are on page 5.

Cancellation of Debt Taxable Income Reporting

If the lender information (the amount of the cancelled debt) is incorrect, you should contact them immediately for a correction. The loan was from 2008 but it was cancelled in 2013, according the the records that led to the notice. If you determine you meet any exceptions or exclusions, document why that’s the case, and respond as Disagreed or Partially Agreed to the CP 2000.


Correct Form 1099-C

If the 1099-C is correct, and you determine that the proposed assessment is correct, submit the Agreed response page and the largest payment you can afford.

Once the tax increase is assessed, the Service will issue a CP 022, which is the first notice demanding payment. If you are able to full-pay that balance due by the notice due date, you are done.

If you need more time than the notice date, you can request a short-term extension to pay of up to 120 days, which is called a Full Payment Agreement. The balance due accrues Failure To Pay (FTP) penalty and interest until it’s paid. With this payment plan, there is no required monthly payment amount, and your 2014 refund would be applied to this balance due (IRS debts are offset before non-tax debts when both debts exist).


Paying Taxes on Cancelled Debt

If you file your 2014 return before you receive the balance due notice, you run the risk of your refund being offset to the non-tax debt. If you need more time than the 120 days, the Service can offer a monthly Installment Agreement (IA). There is a one-time fee of $120 dollars to establish an IA, and your refund would still be offset to the balance due.