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02-16-2017 05:58 PM
I am being audited for 2015 tax year that includes a cancellation of debt that I knew nothing about. I never got a 1099 and this debt turns out is from Verizon for an old cell phone bill from 10 years ago. Looks like the debt was sold to a collector who 10 years later cancelled the debt, Is this considered a valid cancellation of debt? What can I do for this?
02-16-2017 10:44 PM - last edited on 02-17-2017 08:50 AM by HaroldG
Welcome to the H&R Block community.
Forgiven debt is actually taxable income. However, you may be able to exclude the debt if you qualify for an exclusion. I'm assuming you didn't go through a bankruptcy (which is one possible exclusion). For this type of debt typically you would have be insolvent immediately before the debt was cancelled in order to exclude it. If you add up your liabilities and then you add up your assets and your liabilities were greater then you were insolvent and you can exclude the cancelled debt up to the amount by which you were insolvent immediately before the debt was cancelled (the amount by which your liabilities exceeded your assets).
Granted you should have received a Form 1099-C for this debt, but unless you qualify for that insolvency exemption this will have to be added to your tax return. The good news is that unless it's a bill that's a lot more than the usual $60 - $80 phone bill it will not make much of a difference on your tax return. Actually, even if it's for the cost of a $500 phone it will not make that big of a difference.
I would wait and see what the IRS says and then go from there. If it's just the phone bill and the IRS doesn't adjust the return for you then you can amend your return by filing Form 1040X (Amended Tax Return) and that will solve the problem.
Hopefully this helps you out.
Senior Tax Advisor (Tampa, FL)