What debts are forgiven under a 1099-C: Cancellation of Debt form?
The IRS recognizes five situations where a cancelled debt does not have to be reported as income. 1. Bankruptcy the debt was already discharged through a bankruptcy proceeding. 2. Insolvency your total debts exceed your total assets at the time your debt was settled or deemed non-collectable. 3. Indebtedness is due to a qualified farm expense. 4. Indebtedness is due to certain real property business losses. 5. Discharge of your debt was treated as a gift. (Extremely rare) If you are insolvent you need to explain this to the IRS in one of two ways. 1) By filling out IRS Form 982 (Can be difficult to understand): Reduction of Tax Attributes Due to Discharge of Indebtedness or 2) Attaching a detailed letter to your tax return explaining the calculation of your total debts and assets.
