Credit Card Debt ‘Forgiven’, but not forgotten by the IRS

We are often consulted by those who are very unpleasantly surprised when after having negotiated a settlement of the amount of the debt they owe, they receive a receive 1099-C “cancellation of debt” tax notices from the IRS.

Example: John Smith receives a letter from the law firm of Pressler and Pressler demanding he pay the delinquent balance on his credit card of $5,000.00, to Palisades Collection. Smith has never heard of Palisades. He is told that the debt was purchased from ABC Bank where Smith once had an account. What Smith is not told is the Palisades is a ‘junk’ debt collector that purchases limited information about old debts for about two cents on the the dollar and that if that tif he disputes the debt they cannot prove that he owes it. However, Smith who is uncertain about whether he owes the debt wants to avoid collection calls and a possible lawsuit. He agrees to a pay $2,500.00, to Palisades to settle the debt.

What he is also not told is that he will received a demand from the IRS that he pay taxes for $2,500.00.. the amount of the debt ‘cancelled’ by the creditor.