I had incurred a debt of $6000 and I settled the account by just paying $2000. Actually, I had taken help from a third party debt settlement company. However, few days back I received a letter from the IRS stating that I owe them taxes because of the settlement. Is this right? Do I need to pay taxes due to the settlement?

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The IRS takes any forgiven amount in a loan as income. If the forgiven amount is $600 or more than that, you have to pay taxes on that.

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Yes, you’re responsible to pay the taxes as cancellation of debt is regarded as income by the IRS. However, there are some exceptions to this rule. So it’s advisable to consult a tax professional.

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