Have you just got a debt forfeited from your credit card issuing authority, and taken a sigh of relief? Well, think again, the debt owed to the credit card company was not the only debt on your shoulders – remember the IRS? Indeed, if your debts have been reduced by the credit card issuer, it does not mean that the amount has been also reduced in the accounts of IRS.
This applies for Cancelled Debts, Foreclosures, Abandonments, and Repossessions.
For instance, you owed $20,000 to your credit card issuer and $10,000 was forgiven under special circumstances, you are still very much liable to pay taxes on this $10,000. So, after paying off $10,000 debt you may feel that all your records are cleared off, and you do not owe a single penny to anybody anymore. But, IRS is an exception to this scenario because you are still liable to pay off taxes on the forgiven $10,000, which may be a huge amount.
And, if you do not care to account for this tax amount in your next return, you may have lot of your trouble coming your way. Lot of folks become victim of tax issues, just because they do not understand that the cancelled or reduced debts also account for their net taxable income. And, even after filing for their regular income throughout the year, they still owe some money to the IRS as tax towards the forgiven or cancelled debt amount. They are not aware of the very fact that evading taxes on a debt reduction is Impossible because your creditors will always forward a copy of your Form 1099 C to the IRS without your knowledge, which is categorized under other income and you become liable to pay tax on this amount.
What is more, you can ask for debt cancellation or reduction to your credit card issuers and other creditors, but IRS is again an exception to this. Your bank or any other creditor cannot send you to jail because you keep defaulting on a regular basis, but IRS and the government can do so!
Hence, it is advisable to avoid bumping into an IRS trouble very now and then, as the repercussions may be quite horrible. First up, IRS tax issues may have an extremely negative effect on your credit score, and you may face a rusty time ahead, getting any loans or debts sanctioned in your favour ever again.
On a serious note, you may be even jailed if you keep defaulting from your tax payments every now and then. But, on the brighter side, the IRS also facilitates several remedies for tax payments in cases of cancelled debts.
However cancellation of Debt income is not always taxable in cases such as qualified principal residence indebtedness, Insolvency, Bankruptcy, non recourse loans, certain farm debts.
It would be advisable to seek assistance from a CPA or tax attorney before trying to avail these benefits to ensure that you have taken the right step and you do not have to face any adverse consequences of the same.
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