Legal Question in Credit and Debt Law in Massachusetts
about 3 years ago I settled a credit card debit with credit card company with interest and late fees it cae to 10000$ I settled for 7000$ now the IRS is saying the 3000$ difference is income and are charginf me 1068$ in taxes to pay them I dont understand how they can consider the late fees and interst dropped as income can you help answer my question and what I can do thank you linda matson
1 Answer from Attorneys
The IRS code section (108(a)) covers these types transactions. This is a "forgiveness of indebtedness" problem. The IRS treats this transactionas if you had received additional ordinary taxable income in the amount of yor forgiven debt. In their analysis, you "have" received this additional income which they then tax at your applicable tax rate. You probably received a Form 1099-C, a copy of which was sent directly to the IRS.
Proper tax planning (see your professional tax person) can sometimes ameliorate these harsh tax results. (Please see 26 U.S.C. Section 6050P and Pub. 4681 at http://www.irs.gov/pub/irs-pdf/p4681.pdf). Hopefully these reference will clarify how these forgiven debts are treated by the service.
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