As we talked about briefly in a previous section, you will receive a Form 1099-C the following January for every debt that was forgiven over $600. If you were insolvent (more debts than assets) at the time of the debt’s forgiveness, you will need to fill out an IRS Form 982. You should also have some sort of documentation to show the IRS should they audit you.
In addition, if you have several debts that were forgiven, you need to be able to show you were insolvent at the time EACH debt was forgiven. For example, let’s say you started out with $50,000 in debt and your net worth was -$20,000. You settle a $15,000 account for $6,000. This would increase your net worth by $9,000 to -$11,000. You will need to do this for each debt, we recommend using a simple Excel spreadsheet.
If you have other outstanding tax issues, do not attempt to handle them yourself. The IRS is not like dealing with a collection agency and you should seek the advice of an enrolled agent dealing with IRS issues.
