Generally, debt that is forgiven or canceled by a lender is considered taxable income by the IRS and must be included as income on your tax return. When that debt is forgiven, negotiated down (when you pay less than you owe), or canceled you will receive a Form 1099-C, Cancellation of Debt, from your financial institution or credit union. Form 1099-C shows the amount of canceled or forgiven debt that was reported to the IRS. Creditors who forgive $600 or more of debt are required to issue this form.

If you receive a Form 1099-C and the information is incorrect, contact the lender to make corrections. If you and another person were jointly and severally liable for a canceled debt, each of you may get a Form 1099-C showing the entire amount of the canceled debt. Please call if you have questions regarding joint liability of canceled debt.

Exceptions and Exclusions

If you have debt forgiven or canceled and receive a Form 1099-C, you might qualify for an exception or exclusion. If your canceled debt meets the requirements for an exception or exclusion, then you don’t need to report your canceled debt on your tax return. Under the federal tax code, there are seven exceptions and five exclusions. Here are the five most commonly used:

1. Amounts specifically excluded from income by law such as gifts, bequests, devises or inheritances

In most cases, you do not have income from canceled debt if the debt is canceled as a gift, bequest, devise, or inheritance. For example, if an acquaintance or family member loaned you money (and for whom you signed a promissory note) died and relieved you of the obligation to pay back the loan in his or her will, this exception would apply.

2. Cancellation of certain qualified student loans

Certain student loans provide that all or part of the debt incurred to attend a qualified educational institution will be canceled if the person who received the loan works for a certain period of time in certain professions for any of a broad class of employers. If your student loan is canceled as a result of this type of provision, the cancellation of this debt is not included in your gross income. You may also qualify for this exception if you receive student loan repayment assistance or you become permanently and totally disabled.

3. Canceled debt paid by a cash basis taxpayer (most taxpayers) would be deductible

If you use the cash method of accounting, then you do not realize income from the cancellation of debt if the payment of the debt would have been a deductible expense.

For example, in 2018, you own a farm and hire an accounting firm, paying for their services with credit. In 2019, due to financial troubles, you are not able to pay off your farm debts and your accountant forgives a portion of the amount you owe for their services. If you use the cash method of accounting you do not include the canceled debt as income on your tax return because payment of the debt would have been deductible as a business expense.

4. Debt canceled in a Title 11 bankruptcy case

Debt canceled in a Title 11 bankruptcy case is not included in your income.

5. Debt canceled during insolvency

Do not include a canceled debt as income if you were insolvent immediately before the cancellation. In the eyes of the IRS, you would be considered insolvent if the total of all of your liabilities was more than the Fair Market Value (FMV) of all of your assets immediately before the cancellation.

For purposes of determining insolvency, assets include the value of everything you own (including assets that serve as collateral for debt and exempt assets which are beyond the reach of your creditors under the law, such as your interest in a pension plan and the value of your retirement account).

Here’s an example: Let’s say you owe $25,000 in credit card debt, which you are able to negotiate down to $5,000. You have no other debts and your assets are worth $15,000. Your canceled debt is $20,000. Your insolvency amount is $10,000. Because you are insolvent at the time of cancellation, you are only required to report the $10,000 on your tax return.

Reporting Canceled Debt

If you receive a Form 1099-C, don’t ignore it. Although you may not have to report the entire amount shown on Form 1099-C as income unless you meet one of the exceptions or exclusions discussed above, you must report any taxable canceled debt reported on Form 1099-C as ordinary income on one of the following:

• Schedule 1 (Form 1040 or Form 1040NR), if the debt is a nonbusiness debt;
• Schedule C or Schedule C-EZ (Form 1040), if the debt is related to a nonfarm sole proprietorship;
• Schedule E (Form 1040), if the debt is related to non-farm rental of real property;
• Form 4835, if the debt is related to a farm rental activity for which you use Form 4835 to report farm rental income based on crops or livestock produced by a tenant; or
• Schedule F (Form 1040), if the debt is farm debt and you are a farmer.

If you exclude canceled debt from income under one of the form 1099-C exclusions listed above, you must reduce certain tax attributes (certain credits, losses, basis of assets, etc.), within limits, by the amount excluded. If this is the case, then you must file Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment), to report the amount qualifying for exclusion and any corresponding reduction of those tax attributes.

Exceptions do not require you to reduce your tax attributes.

If you’re self-employed and use your car for business, you can deduct certain business-related car expenses.

There are two options for claiming deductions:

Actual Expenses. To use the actual expense method, you need to figure out the actual costs of operating the car for business use. You are allowed to deduct the business-related portion of costs related to gas, oil, repairs, tires, insurance, registration fees, licenses, and depreciation (or lease payments).

Standard Mileage Rate. To use the standard mileage deduction, multiply 58 cents (in 2019) by the number of business miles traveled during the year.

Car expenses such as parking fees and tolls attributable to business use are deducted separately no matter which method you choose.

Which Method Is Better?

For some taxpayers, using the standard mileage rate produces a larger deduction. Others fare better tax-wise by deducting actual expenses. You may use either of these methods whether you own or lease your car.

To use the standard mileage rate for a car you own, you must choose to use it in the first year the car is available for use in your business. In subsequent years, you can choose to use the standard mileage rate or actual expenses. If you choose the standard mileage rate and lease a car for business use, you must use the standard mileage rate method for the entire lease period – including renewals.

Opting for the standard mileage rate method allows you to bypass certain limits and restrictions and is simpler; however, it’s often less advantageous in dollar terms. Generally, the standard mileage method benefits taxpayers who have less expensive cars or who travel a large number of business miles.

The standard mileage rate may understate your costs, especially if you use the car 100 percent (or close to it) for business.

Documentation

Tax law requires that you keep travel expense records and that you show business versus personal use on your tax return. Furthermore, if you don’t keep track of the number of miles driven and the total amount you spent on the car, your tax advisor won’t be able to determine which of the two options is more advantageous for you at tax time. It is essential to keep careful records of your travel expenses (if you use the actual expenses method you must keep receipts) and record your mileage.

You can use a mileage logbook or if you’re tech-savvy, an app on your phone or tablet. A number of phone applications (apps) are available to help you track your business expenses, including mileage and billable time. These apps also allow you to create formatted reports that are easy to share with your CPA, EA, or tax preparer.

To simplify your recordkeeping, consider using a separate credit card for business.

An IRS CP2000 notice is mailed to a taxpayer when income reported from third-party sources such as an employer, bank, or mortgage company does not match the income reported on the tax return.

It is not a tax bill or a formal audit notification; it merely informs you about the information the IRS has received and how it affects your tax. It is, however, important to pay attention to what your CP2000 notice states because interest accrues on your unpaid balance until you pay it in full.

If you receive a CP2000 notice in the mail complete the response form. If your notice doesn’t have a response form, then follow the notice instructions. Generally, you must respond within 30 days of the date printed on the notice. You may request additional time to respond, and if you cannot pay the full amount that you owe, you can set up a payment plan with the IRS.

If the information on the CP2000 notice is not correct, then check the notice response form for instructions on what to do next. You also may want to contact whoever reported the information and ask them to correct it.

If the information is wrong because someone else is using your name and social security number please contact the IRS and let them know. You can also use the link on the IRS Identity theft information web page to find out more about what you can do.

If you do not respond, the IRS will send another notice. If the IRS does not accept the information provided, it will send IRS Notice CP3219A, Statutory Notice of Deficiency, and information about how to challenge the decision in Tax Court.

Do I Need to Amend my Return?

If the information displayed in the CP2000 notice is correct, you don’t need to amend your return unless you have additional income, credits or expenses to report. If you agree with the IRS notice, follow the instructions to sign the response page and return it to the IRS in the envelope provided.

If you have additional income, credits or expenses to report, complete and submit a Form 1040-X, Amended U.S. Individual Income Tax Return. If you need assistance with this, please call the office.

How to Avoid Receiving an IRS CP2000 notice:

• Keep accurate and detailed records.
• Wait until you receive all of your income statements before filing your tax return.
• Check the records you receive from your employer, mortgage company, bank, or other sources of income (W-2s, 1098s, 1099s, etc.) to make sure they are correct.
• Include all your income on your tax return including that from a second job or fees derived from the sharing economy (e.g. renting a spare room out on Airbnb).
• Follow the instructions on how to report income, expenses and deductions.
• File an amended tax return for any information you receive after you’ve filed your return.
• Use a professional tax preparer who will help you avoid mistakes and find credits and deductions you may qualify for.