canellation of debt tax

[Anonymous]

just got paperwork from irs today stating that i owe them money (1500) from the amount of debt cancelled by citi (8000). this sucks!!!!!! i called and researched and its perfectly legal, wished i filed bk back then, would that have helped? can citi still report this a negative on my report if i pay the tax. what can i do? or do i have to suck it up and pay for it?

[GregB]

Those are two completely separate issues.

You will have the negatives on your credit for the debt thatCiti didn't collect.

You will have to pay the IRS for income tax on the amount they excused. You made that amount of additional income in that you didn't have to pay the debt. That would only hit your credit if you don't pay the tax and they record that to your credit.

[pipeguy]

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@Anonymous wrote:

just got paperwork from irs today stating that i owe them money (1500) from the amount of debt cancelled by citi (8000). this sucks!!!!!! i called and researched and its perfectly legal, wished i filed bk back then, would that have helped? can citi still report this a negative on my report if i pay the tax. what can i do? or do i have to suck it up and pay for it?

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If your financial situation was close to bankruptcy at the time the debt was "forgiven" you might have an good reason for appeal with the IRS. One of the reasons a "gain" from a 1099-C is excused is if at the time of the write off of the debt you are insolvent. Do a search on the IRS.gov site under 1099-C and the instructions explains how to determine if you were insolvent. My thought is if you were that close to going bankrupt, some or all of the tax bill can be excused through your net worth at that time. Something to consider. 

[RobertEG]

How did CITI "cancel the debt?"

Did they do a charge-off?  Or did they accept a payment for less than the full amount as satisfaction of the debt?

Neither of those "cancel" the debt.  The full debt remains what it was, regardless of how the creditor handles it in their accounting books, or how much they agree to accept as your legal satisfaction of the debt.  A debt owed is a taxable receivable asset, and IRS wants its share of that taxable asset.

It looks standard to me.  You obligated the debt, and must account to both the creditor and the IRS on its disposition.