The IRS recently sent me a notice that I owed taxes on a cancelled debt. This debt was from Citibank. The problem is that no debt was forgiv...

Question

The IRS recently sent me a notice that I owed taxes on a cancelled debt. This debt was from Citibank. The problem is that no debt was forgiven...this original credit card account was taken to court and a judgment was granted. This judgment was paid over the course of 3-4 years and shows as "PAID" in the Missouri Case Net system. This judgment was settled for less than original amount, but no way was any of it forgiven before it went to judgment. The IRS is saying I need to file a form 982. I've had other judgments paid the same way, actually another Citibank judgment, and never received any correspondence from the IRS or the bank. Is there precedent for having to pay taxes on credit card debt that has been through the courts?

Answer

The potential cancellation of debt that is treated as taxable income probably arose from the difference between the original amount (e.g. $100) and the amount of the judgment (e.g. $80) you paid. The difference (e.g. $20) can be income. There are exceptions, adjustments and defenses to this rule which are spelled out in the form you mentioned. You may wind up owing very little or nothing in the end. But you have to deal with the IRS notice right now.