JUST ASK: Is forgiven debt taxable?

 Is it true that if you don’t pay a business or individual for a product you purchased or a service you received, and that debt is not collected for or had been forgiven, then that is consider income for that person that owed the bill, and that amount should be reported as income on your yearly income taxes?

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The best person to ask is your tax advisor or attorney, if you are in this situation.

We found the following on IRS.gov:

Topic 431 – Canceled Debt – Is It Taxable or Not?

In general, if you are liable for a debt that is canceled, forgiven, or discharged, you will receive a Form 1099-C, Cancellation of Debt, and must include the canceled amount in gross income unless you meet an exclusion or exception. If you receive a Form 1099-C but the creditor is continuing to try to collect the debt then the debt has not been cancelled and you do not have taxable cancellation of debt income.

A debt includes any indebtedness whether you are personally liable or liable only to the extent of the property securing the debt. Cancellation of all or part of a debt that is secured by property may occur because of a foreclosure, a repossession, a voluntary return of the property to the lender, abandonment of the property, or a principal residence loan modification.

You must report any taxable amount of a cancelled debt for which you are personally liable, as ordinary income from the cancellation of debt. You must report the taxable amount of a taxable debt whether or not you receive a Form 1099-C.

Additional information can also be found in Publication 525 <http://www.irs.gov/publications/p525/index.html>, Taxable and Nontaxable Income.