If debt is negotiated through a settlement or something like that, whereby I can pay less, who reports it to the IRS as income? Can that be avoided?

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One thing I would like to add is that if the settlement is done after a lawsuit has been filed and you have defended yourself, 1099 might not be issued.

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Well, the forgiven amount is considered as income and that's why you have to pay taxes for it. And it's the lender's responsibility to report the reduction to the IRS with a 1099-c form. A fine of $50 is imposed if he fails to report.

What you can do is, if you want to dodge the taxes.. ask your lender not to report with 1099-c and pay him $50 in excess to the settled amount. Further complications or inquiries can be avoided if the settlement agreement mentions the debt to be a disputed one.


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