Tax Mistake #6 - Not Reporting Debt Consolidations

Filed in archive Tax Preparation on March 13, 2010

© blmurch

The IRS has always been particularly about making sure that you report all your income on 1040 taxes. Sometimes, though, it is possible that some things are not recognized as being income.

If you have had a debt consolidation in the past year, then you may be responsible to report it as income. According to Steve Bucci, at Finance.yahoo.com, "IRS rules state that if more than $600 is knocked off your bill (you'd be fiscally insane to go through all this for less), a 1099 is issued and you have to recognize the settled portion of the debt as income ... and pay taxes on it!"

Even if you should not receive a 1099, it would be very wise to add the amount of debt forgiveness on your 2009 taxes somewhere. You can be sure that someone - either the debt consolidation company or your debtors - reported it on their Federal taxes.