As the new year continues to settle in, many Minnesota residents are beginning to think about their state and federal income tax filings. Of course, this means it's necessary to gather records of income related to work, investments and other financial instruments. What some people may not realize is that that canceled debt is also considered a part of overall income.
In order to claim the debt, individuals must complete IRS Form 1099-C, which covers debts settled for less than the total amount owed. Realistically speaking, for those who are just trying to find stability after receiving debt relief, an additional tax burden could come as a shock. Sadly enough, this aspect of the tax code could cause a person to incur additional debt.
Tax debt can be very difficult to deal with. It's no surprise that IRS officials are typically very aggressive about trying to recoup supposed unpaid taxes. So, what can be done to resolve this issue?
Knowing how serious tax officials are about collecting unpaid taxes, it's helpful to take action right after receiving an IRS notice of liability. Failure to act quickly could result in additional penalties, which just makes it harder to deal with tax debt. This is especially important for individuals who are in the process of dealing with other types of debt.
Another important thing to note is that additional tax liabilities as the result of canceled debt might be avoidable. According to a report from Fox Business, it may be possible to receive an exemption, which could prove to be a tremendous relief. Regardless, it's still valuable to stay on top of potential tax burdens and address tax issues as they arise.
Source: Fox Business, "Don't be Scared: The Tax Form Everyone Fears," Jan. 20, 2014