It’s the time of year that most adults dread: tax season. Collecting all of the necessary paperwork and information and finalizing the filing process can be stressful. But according to USA Today, some taxpayers are facing even more stress during this tax season.
The recession has meant that many consumers have run into financial hardships, whether in the form of excessive credit card debt, the need to file for bankruptcy or needing to seek a loan modification or face foreclosure. They’ve been and in large part continue to be tough times, and the tax system could be a stressful reminder of that for some folks.
The many consumers who have defaulted on their credit card debts, filed for bankruptcy or faced the hardship of losing their homes to a short sale or foreclosure might think that their slates are clean — the debts they once owed have been forgiven or canceled. And while that might be true for the most part, that doesn’t mean that the IRS sees the debt as forgotten.
Sources report that there is a rise in the number of taxpayers receiving 1099-C forms in the mail. These forms basically list supposedly forgotten debt as taxable income and could increase the taxes a person owes. If a taxpayer cannot prove that his debts were forgiven due to bankruptcy or that he was insolvent at the time the debts were dismissed, then he will be required by law to have his taxes reflect that.
Where short sales, loan modifications and foreclosures come in is with a piece of 2007 legislation that is about to expire at the end of the year. Forgiven mortgage-related debt on a principal residence has been considered exempt from taxes. If government lets the law expire, then more than the already high amount of 6.4 million 1099-C forms that have been sent out this year could be sent out to taxpayers next year.
If you receive a 1099-C form and are confused, don’t hesitate to reach out for professional assistance. If you have filed for bankruptcy in the past and those or other legally forgiven debts are coming back to haunt you, a bankruptcy attorney could help you find the proof you need to get through the stressful, confusing process.
USA Today: “Canceled credit card debts come back to haunt taxpayers,” Sandra Block, Mar. 4, 2012