Debt Prison

The amount of debt you settle may be taxable by Federal and State Government. Most people are not aware that if the amount of settled debt surpasses $600, the IRS considers this taxable income. If you have settled with a creditor on a debt, they should send you a 1099-C tax form. This form will list the amount of forgiven debt and the interest. This was a surprise to me: the idea of our government demanding payment from those of us who can least afford to give (sarcasm intended). The IRS last updated Publication 908, which states in regards to settled debt, or forgiven debt, if a debt is cancelled or forgiven the debtor generally must include the forgiven amount in gross income for tax purposes.

See also, all of my articles on collection agencies.

Now keep in mind that debt that is discharged due to bankruptcy is not considered forgiven debt, according to Publication 908. So if you filed bankruptcy on some debt, those forgiven debt amounts are not considered income by the government. However,

If the amount of debt you owe is greater than your assets, meaning you are insolvent, the IRS does not require you to report the forgiven debt. But, you cannot exclude any amount of forgiven debt that is more than the amount by which you are insolvent.

So if you owed Bank of America $6,000 and they settled for $2,500 (you lucky dog), then you could expect a 1099-c from BOA explaining the forgiven debt of $3,500. See also, How to Settle Your Debts on Your Own.

What if you decide not to report it?

Hey no problem if you don’t want to claim this forgiven debt as income… however, you should know that the IRS was also given a copy of the 1099-c by BOA… so they know about the income. Maybe they’ll just flag you for an audit.

3 Instances when you don’t have to claim forgiven debt

This is from www.3debtconsolidation.com

There are 3 situations under which forgiven debt is NOT included in your taxable income:

1) Battled Contest
If you dispute an amount charged on your credit card and win the debt settlement, you are excluded from the Discharge of Indebtedness (DOI Income) rule. For example, Visa might say you owe $1500 in credit card debt due to a recent purchase of expensive shoes. You know you haven’t purchased those shoes and dispute the bill and the court case goes on for weeks. In the end, you agree to pay Visa $150 to reach a debt settlement. Since your debt owed has legally been reduced from $1500 to $150, you would be liable for the DOI income rule. However, since you won this case by a protest or a dispute (in court or verbal settlement), you are NOT required to include this amount as part of your taxable income.

2) Bankruptcy Declaration
When you’ve declared bankruptcy and are making for example only 10% of the original debt payments you owed, the other 90% is excluded from the Discharge of Indebtedness Income rule.

3) Insolvent Financial Condition
When you are insolvent, meaning your liabilities owed exceed your total assets, you are not required to pay any tax on any debt reduction or debt settlement benefits you receive.

Discuss this article and meet new people at Debt Prison Forums.

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This time of year many people don’t have enough money to pay their taxes and aren’t sure how it should be handled. Perhaps you’ve gone years without filing an Income Tax Statement at all – and now you’re ready to play catch up. DebtPrison.Net doesn’t offer legal advice. The information found in this article is available on various websites across the web. The correct answer to ‘Can I go to jail for not paying my taxes?’ is……yes you can. But there are ways to avoid time in prison. Overall, the best strategy is to file an income tax form and let the IRS know that you cannot pay the money at this time. At least they are aware that you cannot pay the money and they know that you know… just be up front.

**Disclaimer – Debtprison.net does not administer legal or financial advice. The contents of this website are my opinions on collection agencies and how to deal with them. Nothing on this website should be interpreted as legal advice or council. No opinions on this website should be used to replace the advice of your financial advisor or your legal council.

Do I have to pay a Federal Income Tax?

You may not have to pay an Income Tax, but you do have to file an Income Statement – like IRS Form 1040 if you received any income in the prior year which is taxable. State and Federal Laws are set up to bring criminal charges against you for failing to pay income taxes. In the United States you have to file a Federal Income Tax Statement if you received earned income. So if you only receive Social Security payments, you don’t have to file an Income Tax Statement. In most states you also have to file a Resident Individual Income Tax Form, like this one.

Perhaps you’ve heard some people say that you don’t have to file an Income Tax Statement. Some people say the IRS is illegal, unconstitutional, and downright unfair. Although all of these things may be true – you will still go to jail for failing to file – if the IRS can prove that you purposely failed to pay your required tax. These would be criminal charges and you could serve time.

What you should do

If you have earned income…….file a 1040, even if you end up owing tax and can’t pay. I highly recommend turbotax, it’s online and I use the free edition – costs nothing to use and you can file electronically. If you can’t pay it’s alright, you can pay later. One of my good friends is currently behind, he owes the IRS $500.00 bucks from 2006, he hasn’t paid them yet, but is paying them back this month.

Chances are there is an IRS office located at the local Federal Building in your home town. There are IRS professionals there who can help you fill out the correct forms and set up a payment plan if needed.

Make sure you are honest

Many people get in trouble because they failed to report all of their income to the IRS in a prior year. Or perhaps you took some deductions that you legally weren’t entitled to (claiming your brother’s kids as dependents – and he’s claiming them too). If you lied on a previous Income Tax Statement it better be an honest mistake. If it appears to be a mistake the IRS may let you off with taxes and penalties. But if the IRS finds a pattern of income deception (trying to hide income) you may end up paying in more ways than one. You could serve time in prison and end up paying the tax back.

You haven’t filed in years and think they forgot about you?

Don’t make this mistake. If you ever worked for a business that filled out any paperwork when you were hired – the IRS has a record of your employment and income with this employer. Your name, like many, is flagged in the IRS database as an Income Tax Evader. Believe me they are simply giving you enough time to hang yourself. Then they come galloping in with audits, penalties, and criminal charges. Why take that chance? If you are years behind walk into your local IRS Office, sit down and have an honest discussion with them. It’s better if you come to them first.

Discuss this article, share ideas, and meet new people at Debt Prison Forums.

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