Background

• Debt forgiveness and the possible taxation of the monies owed stems from the Mortgage Forgiveness Debt Relief Act of 2007 and includes debt forgiven from 2007 through 2012. This legislation addresses the commercial lender who is a mortgage lender, such as a bank. The lender is required to report the forgiveness of your debt on IRS Form 1099-C, Cancellation of Debt.
  
  

Exceptions

• A canceled debt may not be taxable for a number of reasons, including bankruptcy, insolvency, for certain farm debts and for nonrecourse loans. The IRS considers debt discharged through bankruptcy nontaxable. If you are insolvent, some or all of the canceled debt may not be taxable if your total debt exceeds the fair market value of your total assets. The IRS recommends homeowners who fall under this exception to consult a tax professional for guidance, which is the same advice given to people who own a farm. Nonrecourse loans involve the foreclosure and repossession of your home by the lender which may include other tax consequences.
  
  

Home Foreclosure

• With a home lost through foreclosure, cancellation of debt income is not taxable for nonrecourse loans. If the sale of your foreclosed home results in a reportable gain, meaning you made money on the sale even though you lost your home, those funds may be taxable. There are exclusions, including if you occupied this home as your chief residence for two years in the five-year period leading up to foreclosure. Those exclusions are $250,000 for single filers and $500,000 for married couples filing a joint return.
  
  

Disputes

• Information submitted by the commercial lender on Form 1099-C may not be correct. The IRS instructs taxpayers to contact the lender to resolve disputes.
  
  

Payment Plan

• In the event your tax professional has determined you owe money, you can make payment in full to the IRS to settle your debt. If unable to make full payment, you can fill out the installment agreement form sent by the IRS giving you the opportunity to request making payments. That notice is usually forwarded by the IRS with their bill to you or you can request the form by calling the agency at 877-777-4778.
  
  

Considerations

• If you cannot afford payments, the IRS has a Taxpayer Advocate Service to work with. You may also qualify for a Low Income Taxpayer Clinic, an arrangement independent of the IRS that represents low income taxpayers who have tax disputes with the IRS. Debt adviser Steve Bucci, writing for Bankrate.com, advises taxpayers to fill out IRS Form 982, a second debt forgiveness form, and send it with Form 1099-C when filing their tax returns.