Will I Pay Taxes To The IRS On Forgiven
This question is the most
confusing issue about debt settlement.
This web page is not setup for the purpose of
advising individuals on how one should file income tax returns, but merely an informational page to direct someone
quickly to view exactly what the IRS has to say concerning debt forgiveness. You should consult a tax expert or
certified public account concerning any tax issues that you may have.
The internet is a very useful and powerful tool
but needs to be used with caution. Many Americans are reading information concerning subjects written by people in
blogs and websites that have not been researched or based on facts. This becomes a major problem for someone who is
searching for the truth because like the old saying," if lies or misinformation are repeated enough they eventually
will be viewed as the truth."
typical articles found on the internet about debt settlement concerning the IRS mentions the "fact" that you will
receive a 1099-C and "will" pay income taxes on the amount forgiven as ordinary income. This is true in part but
may not the case. What appears in most articles concerning the IRS ruling on debt forgiveness is usually not
There are many reasons this is reported this way, typically it comes down to
one of two reasons. First the author is just passing on misinformation because they didn't know or didn't care to
research the subject. Second the author is using the tax issue to get you to use another method that he or she may
be promoting other than debt settlement.
only truth is right from the "horse’s mouth" the IRS. But most people have no clue where to look and soon become
frustrated, they stop searching only to trust what they heard or read without getting the full
The section of the IRS code referring to debt
forgiveness is 6050P. This section clearly states what organizations are required to file with the IRS and which
are not. The November 2004 IRS bulletin gives the final review of 6050P and explains the requirements for
discharges of indebtedness by organizations that have a significant trade or business of lending
Note it's important to understand that the IRS
clearly defines in this bulletin what organizations fall under this category. They also included a section
concerning debt buyers, (collections companies). On page 786 it mentions that there are three safe harbors under
which organizations will be considered not to have a significant trade or business of lending money.
Commentators for the IRS first mention the subject of acquiring debt other than from the debtor,
in other words an organization (debt collector) buying debt from creditor (credit card company). The commentators
seemed a bit confused because of an early proposed regulation 6050P-2(e) which says the debt buyers are considered
The final regulations in the 2004 bulletin clarifies that a debt obligation acquired from the
debtor or any person other than the debtor is subject to reporting under section 6050P(c)(2)(D) if the owner of the
obligation (debt buyer) is engaged in a significant trade or business of lending money. Most debt buyers are just
that, "debt buyers" not lenders of money.
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This article is not advise concerning filing of
personal income tax, the
purpose is for information only regarding the IRS code. Any conclusion drawn from this information should be
reviewed by a certified tax advisor before filing income tax.