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Question DetailsAsked on 9/26/2017

Does Nationwide Debt Direct have the right to involve the IRS and have the customer pay taxes on debt settlement?

I was sent an IRS statement saying I owe a certain amount in taxes from some of the credit cards with who
I consolidated debt settlement with Nationwide Debt Direct.
I am devastated

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A lot of people get surprised by this. I am assuming you had more than a debt consolidation (bringing severral debts or loans together under one consolidated loan for the total amount due) - for this to happen I presume you had some debt cancellation as well as part of the consolidation. In that case, the reporting entity on the loans is re4quired by law to file a form with the tax agencies on the forgiven debt - not of choice on their part. You should receive, by january 31, 2018 (may receive it earlier) a 1099-C showing the amount of cancelled debt - that form is probably what generated the IRS claim for taxes due. Because the IRS evidently sent a tax-due notice, I would suspet this was a 2016 event so they expect to see this income appear on your tax return in the year the debt was cancelled.


With some exceptions (detailed in following link) forgiven or cancelled debt is considered taxable income by the IRS (and most likely your state and maybe even your city [like NYC] too, if they have an income tax).


https://www.irs.gov/taxtopics/tc400/t...


Here is another info article (not from the IRS so not "gospel") on the subject of credit card debt cancellation specifrically:


https://www.creditcards.com/credit-ca...


In the fine print of the application or agreement for the debt forgiveness there should have been a disclosure (probably buried in the pages of fine print) that the forgiven amount might be subject to taxation as income. The tax agencies see this as equivalent as income - basically like you were paid that amount and used it to pay off the debt. Probably the main reason they do this is because the lender can deduct (write off) the forgiven or cancelled amount, hence that amount is "lost" to taxation exposure - so they tax you on the forgiven amount instead to make the cancellation technically "revenue neutral" taxwise - to the government at least, obviously not to you.


Note the cancelled amount would be shown as income on your income tax return - depending on your tax situation, that might or might not result in increased taxes due depending on your income level, number of deductions and exemptions and credits and such.


Unless you qualify for one of the exemptions in the reference above you are not at all likely to get out of this. If in financial dire straits, as you probably are if consolidating loans, you can contact the IRS (and possibly state/city if applicable) about paying off the tax bill over time. Your notice from the IRS probably had a reference to contacting them if you are unable to pay the full amount due by their deadline. Here is a link to an introductory FAQ on that with links on the payment programs and offer in compromise programs (where they settle for less taxes than the amount due):


https://www.irs.gov/newsroom/what-if-...


BTW - note if you have student loans (or almost any other kind of debt for that matter) cancelled or reduced amounts due (including "time-out" cancellation after so many years of good payment history) also fall under this rule - a LOT of people using the percentage of income or similar student loan payment plans which cancel the remaining debt balance after 15 - 20 years pay the minimum amount hoping most of it (which can actually, with interest, bemore than the original loan in some cases) will be discharged - then get shocked to find they are being taxed in the year of discharge on, in some cases, $100,000 or more in discharged loan amount !


Good Luck

Answered 1 year ago by LCD




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