Be Informed: Tax Consequences of Bill Consolidation

One way to reduce the burden of your bills is to consolidate them through bill consolidation. With bill consolidation all your bills are combined into a single monthly payment. You can often lower your monthly bill payment by consolidating multiple bills into one. Though bill consolidation provides you with the benefit of an easier-to-manage payment, there is a drawback. There are tax consequences of bill consolidation. You could end up owing taxes to the government after consolidating your bills.

How Bill Consolidation Can Affect Your Taxes

During the bill consolidation process, some of your creditors and lenders might forgive part of your debt. While it’s rare, some of them might even forgive your debt completely. Whenever businesses cancel a debt for its customers, the Internal Revenue Service (IRS) requires them to report the amount of the cancelled debt. Not only does the business have to send the IRS the amount of the cancelled debt, they’re also required to send you notification that the cancellation was reported. Once you receive this cancellation, you have to include the amount of the cancelled debt in your taxable income when you file your income taxes. This could mean you owe more taxes to the government. Depending on your income level, the cancelled debt could put you in a higher tax bracket.

Form 1099-C Cancellation of Debt

The lender will notify you of the cancelled debt by sending you IRS Form 1099-C. The form will include the creditor’s name, address, and federal identification number along with your name, address, and social security number. Information about the debt is included on the form: Date canceled, amount cancelled, interest, account number, whether the debt was cancelled in bankruptcy, and the fair market value of any property associated with the debt. If you’re required to file income taxes, you must include the amount of canceled debt as part of your income. If you don’t report the debt cancellation, you could face fines and other penalties from the IRS.

The Insolvency Exception for Cancelled Debts

You are said to be insolvent when the amount of your debts exceed the fair market value of your assets. According to the IRS, you may not be responsible for paying taxes on all or part of the cancelled debt, if you were insolvent at the time the debt was cancelled. If you think you were insolvent when your debt was cancelled, you should contact a professional tax preparer to help you determine if you were indeed insolvent. The tax professional will also help you figure out the exact amount of the cancelled debt you’re liable for paying taxes on.

Getting IRS Help With Cancelled Debt

If you need help with tax issues surrounding cancelled debts contact the IRS by calling the number that appears on your 1099-C form. If you that does not help, you can call 1-800-829-1040 Monday through Friday, 7:00 am to 10:00 pm. You can get face to face help by visiting your local Tax Payer Assistance Center (TAC). You can find the TAC near you by visiting the IRS website.