Cancellation of Debt
If I receive a Cancellation of Debt and had it put on my taxes, am I still to pay the amount that was forgiven? Isn't one or the other?
The bank that sent the Cancellation Form,
(form 1099-C), now wants the amount that was forgiven. We already are paying the taxes to the IRS. We are very confused, hope you can help.
1 Answer from Attorneys
Re: Cancellation of Debt
I have always taken the position that the bank's admission that the amount had been discharged was binding, and bank counsel have gone away once the 1099 was brought to their attention. However, I have heard lawyers argue that the actions are not inconsistent. Clearly, you should not be in the position of paying the tax due on the discharge as well as the underlying debt!
You should also notify the IRS immediately that this problem has arisen, and defer any further payment of the tax on the 1099 income until this situation has been resolved. You can get a refund for past amounts paid only if you have to pay the debt; this can be a problem because of the statute of limitations on amended returns.
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