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My wife had defaulted on her credit cards in late 2012/early 2013 due to financial circumstances. In mid-2013, we setup payments with issuer and that was that. We filed taxes for 2013 and didn't declare cancelled debt because we were making payments on it. Payments for two of the cards ended in May 2015 and the last one is going to end in a few months.

Fast forward to today, I received a letter from the IRS asking for taxes on the cancelled debt because the issuer declared it on their return as cancelled.

What can I do to resolve this? I am going to call the issuer and request a statement and since I paid by check, I have online withdrawal slips. Will IRS consider this as sufficient info? Can I pay taxes on the debt this year and somehow claim it back the next.

Edit: The issuer didn't forgive any debt. We are paying everything she owed.

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    I would expect that the IRS do not want to know how much you paid, they want to know how much debt you had cancelled - i.e. difference between what you owed and what you will eventually pay. – DJClayworth Oct 20 '15 at 16:48
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    Did your payments cover all of the original debt with interest, or did you strike a deal to pay down only part of the debt with or without reduced interest? – user32479 Oct 20 '15 at 17:19
  • Did you ever receive a 1099-C or 1099-MISC form from the issuer? – user662852 Oct 21 '15 at 1:56
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    I would be prepared to argue that interest not collected is /not/ forgiven debt and it is unjust to count such phantoms. Failing to make an expected income is not a real loss. – Joshua Oct 22 '15 at 3:53
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    Changing the interest rate on a debt is not considered cancellation of indebtedness--it is a modification of the debt. A significant modification is treated as the issuance of a new debt in exchange for the old debt. See Section 1.1001-3 of the tax regulations. You won't have COD income from a reduction of the interest rate (unless the principal amount of the debt is also reduced). – Heath Oct 23 '15 at 17:59
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I'd call the IRS or talk to an accountant about what to do. This may sound crazy, but I have found the IRS to be helpful in these kind of situations. Luckily they are not terribly busy this time of year so it is easier to get through than earlier in the year.

To me (a layman) this sounds like fraud. In some people's cases they have had debt forgiven. The collection company can pile on whatever charges they wish and then issue a 1099 to you. Given the widespread lack of ethics in the industry, is such a thing surprising? Once you have had debt forgiven can you really nit pick the actual amount? It becomes difficult.

Your case sounds very different. You had no debt forgiven, yet they are still attempting to 1099. I'd encourage you to fight it with all your might. Be a champion for other consumers who have been burned by these crooks. You may go as far as seeking the advice of an attorney on contingency. Sue the jerks. Turn them in for tax fraud. Whatever.

Go get 'em tiger.

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