How to File for IRS Debt Relief

By Larry Amon

Overview

If you are unable to pay a debt and the lender forgives you for this debt, then you are required by the IRS to report that forgiven amount as income. Since you were going to pay it, but now you don't have to pay, that extra money in your pocket is taxable. There are exceptions to this rule and, since the Mortgage Debt Relief Act of 2007 was passed, homeowners who find themselves under foreclosure or have had their mortgages restructured for various reasons may qualify for debt relief. Follow these steps to find out how to get the relief.

Step 1

Know if you qualify for debt relief. According to the IRS, if you are forgiven for a debt under certain conditions, you do not need to claim the forgiven amount as income. These conditions include debts forgiven as part of: bankruptcy; non-recourse loans (where lenders repossess the property in which you owe); some farm debts where farmers receive at least 50 percent of their income from farming; and mortgage loans in which the residential home was foreclosed or where modifications to the loan was made during the calendar years 2007-2012. IRS Publication 4681 "Canceled Debts, Foreclosures, Repossessions and Abandonments" has detailed explanations of each exception and examples for each. (See Resources for link.)
Step 2

Obtain Form 1099-C from your lender. Form 1099-C, Cancellation of Debt, should be sent to you by your lender stating how much debt was forgiven in box 2. This form should be received by the beginning of February if the debt forgiven was more than $600.

Step 3

Fill out IRS Form 982. Form 982, "Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Adjustment)," is the form you will need to use when reporting your forgiven debt. Since this form is used for other purposes, only lines 1e and 2, and possibly 10b will need to be filled in. This form will be on your tax software or can be downloaded from the IRS site. (See Resources for link.) You can also contact the IRS at (800) 829-3676 for a copy.
Step 4

File your taxes. Complete your taxes as normal and include Form 982 and a copy of the 1099-C from your lender by April 15 unless you filed for an extension.

Skill: Moderate
Tip: Read IRS Publication 4681, "Canceled Debts, Foreclosures, Repossessions and Abandonments," carefully.
Tip: Consult a tax specialist. Mistakes on taxes can be costly, so if you are at all uncertain, you may want to spend the extra money consulting a tax specialist or try calling the IRS help line at (800) 829-1040.

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