Taxes on Cancelled Debt

Last updated on August 29, 2021

If you have a debt forgiven or cancelled, you will need to pay taxes to the IRS on it. Many taxpayers who do not know that the IRS charges taxes on forgiven or cancelled debt end up in tax debt.

The IRS sees unreported taxes in cases of cancellation of debt as unpaid taxes. Taxpayers may expect to receive an IRS notice of tax debt if they have not paid taxes on cancelled or forgiven debt.

The first step after a cancellation of debt is to celebrate the cancellation. The next step is to calculate the taxes you need to pay to the IRS. It kills some of the joy of getting out of debt, but the IRS can anytime recover the taxes owed if you procrastinate or refuse to pay. Moreover, the IRS charges interest and penalty on any amount of tax debt. Therefore, it is wise to pay any back taxes, however little, at the earliest.

Many taxpayers take outside help for paying of tax debt. Expert tax help ensures you get into the most advantageous agreement with the IRS. They help in reducing the penalties on tax debt, reduce the tax debt amount if possible and choose a payment program that helps taxpayers to pay the debt amount comfortably.

If you are due to get a refund, you need to ensure that the IRS hasn’t deducted the taxes you owe from it. Many times, the IRS cuts the amount owed from a refund if taxpayers do not pay owed taxes. For best resolution of tax debt, however, it is best to hire legal tax help that can effectively handle a tax case.