Tax: Explaining the Bad News about Canceled Debt to Clients

Meet Form 982.

By Eric L. Green
Tax Rep Network

“What do you mean I have to pay tax on that debt? It was a debt, and they forgave it. The bank gave me a gift; I am pretty sure that is how it works.”

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All of a sudden, my client – who five minutes before told me they knew nothing about taxes – is now explaining to me, a tax attorney, that the canceled debt cannot be income and that a third-party bank obviously meant it as a gift.

Sadly, it is not a gift; there was never any intent for it to be a gift. When either the bank or another creditor writes off that debt you owed, they are required to file a 1099-C to report the canceled debt to the IRS so the lender can take the bad debt write-off. According to Congress, the courts and the IRS, the recipient now has income because they received value that they do not have to repay. In tax parlance it’s called an “ascension to wealth.”

Posted on January 9, 2023

Eric Green

About the Author

Eric L. Green is a practicing tax attorney, author, speaker, and coach.

He founded Tax Rep LLC, which runs the popular tax representation practice-growth training and coaching program Tax Rep Network.

As the primary instructor and coach at Tax Rep Network, he has helped hundreds of accountants start and grow successful tax representation practices.

Eric is a partner and founder of the Green & Sklarz law firm in New Haven, Conn., where he focuses on taxpayer representation before the IRS, Department of Justice Tax Division, and state revenue departments. Before becoming an attorney, Eric was a senior tax consultant for national and international accounting firms, including KPMG and Deloitte & Touche.

Eric developed a national reputation by building a remarkable record of negotiating favorable settlements in thousands of civil cases against government agencies and has also been able to convince government agents and attorneys to forgo criminal charges and civilly resolve many cases.

Eric is a Fellow of the American College of Tax Counsel, an organization in which membership is an honor reserved for those at the top of their chosen profession. The College’s members, called “Fellows,” are recognized for their extraordinary accomplishments, professional achievements, and dedication to improving the practice of tax law. Fellows must be nominated by their peers for this honor.

Eric is a frequent lecturer at American Bar Association Tax Section conferences, accounting conferences, and state Enrolled Agent conferences. He served as adjunct faculty at the University of Connecticut School of Law, teaching law students to handle taxpayer representation matters in the low-income taxpayer clinic. He is often quoted in the Wall Street Journal, USA Today, CreditCard.com, and Consumer Reports Financial News.

Eric is the author of The Accountant’s Guide to IRS Collection, the Accountant’s Guide to Resolving Tax Debts, a contributing author of Advocating for Low-Income Taxpayers: A Clinical Studies Casebook, and was interviewed for the book Stop Hiding from the IRS: The Insider’s Guide to Solving Your Tax Debts Once and For All.

He received his Bachelor of Business Administration degree in Accounting with a minor in International Business from Hofstra University and is an honors graduate of the New England School of Law. He also earned a Master of Laws in Taxation from Boston University School of Law.

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