Quick Tax question.

[Mondavi]

If your account goes into a charge off and the creditor adds 6 years of interest and penalties are you liable for the entire amount you did not pay including the interest and penalties past the charge off or just the original charge off amount minus what you paid to settle?

Thanks

[guiness56]

What are you referring to?  A 1099?

[Mondavi]

Yes a possible one next year.

[guiness56]

That depends on what is on the 1099-C.  They can report all interest accured in a separate box than the principal amount.  If they only report the principal, and you pay taxes on it, I am not sure they could actually try to collect anything else from you on a debt that was forgiven and no longer exists.

Have you read about the 1099-C on the IRS website? 

[Mondavi]

First thanks for the help. The debt is not forgiven yet. I should have been more specific. They debt still has two more years to go on my credit. DoFD was 6/2008. I was past SoL though for being sued at least though.

I had to take care of this debt before I could move forward with a home purchase. "If I waited another two years who knows what home prices and interest would be by then." It was a huge mess. It was fraud and the bank even acknowledged that but the bank could care less because they said in the fine print of my contract that I could not sell "the boat" without asking permission from the them first. So that made me still liable.

The actual amount from what I am going to settle vs. the original CO amount difference is $16k. I can deal with that. Its just on top of that they added another $17k in interest and bullcrap that is what I am worried about getting added to the 1099c.

[guiness56]

Got it.  I found this on the website:

The 1099-C may or may not include interest. IRS instructions state that including interest on the form is optional. The same is true of “nonprincipal amounts” such as penalties, fines, fees, and administrative costs. It is up to the lender whether to include those. If they are included, you may or may not have to pay taxes on that amount. According to the IRS, “Whether the interest portion of the canceled debt must be included in your income depends on whether the interest would be deductible if you paid it.”