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busdriver · Journeyman Joined: 16 Mar 2009 Posts: 3497

Credit relief costly: IRS sees forgiven debt as income

But two weeks ago Carocci, owner of the Sub and Pub on West First Street in Fort Myers, got an unpleasant surprise when the credit card company, Bank of America, sent him a letter telling him that he’ll have to pay income tax on the money he saved.

Like increasing numbers of financially strapped people, he’ll be getting an Internal Revenue Service 1099-C, which the bank is legally required to send if it forgives a debt.

The IRS views that as income that will be taxed, but it doesn’t feel that way to those involved.

“It’s going to be nasty come tax time,” said Carocci, already facing reduced customer traffic because of the recession and road construction downtown.

“You’re talking about adding on a 40-some-thousand dollar income that’s had no taxes paid,” he said. “You think you’re out from underneath and then wham.”

If he’d known about the taxes due, he said, “I’d never have settled.”

Statistics aren’t available on how many people will be affected, but American Bankers Association spokesman Peter Garrutio said a Nilson Report survey showed that in 2008 lenders gave some form of credit card relief to 2.7 million people in the United States.

Any debt forgiveness for more than $600 legally must be reported on a 1099 to the IRS, he said.