If the form has already reached the IRS, a form 982 may need to be filed with the 1040 and an explanation attached containing the reason why the debt wasn’t actually forgiven, i.e. didn’t file for bankruptcy and no personal liability discharge occurred as a result.
Debt Settlement Versus Bankruptcy
For someone struggling with credit card debt, settling for less than the amount owed can be a real blessing until the 1099 form is received. If money is being saved for the purpose of settling a debt, forgiven debt as income should be taken into account before a settlement is reached. An advisor should be mapping out whether insolvency will be a way to avoid tax on the forgiven amount or not.
Bankruptcy avoids the issue entirely as debts discharged in bankruptcy aren’t treated as taxable income and the IRS won’t try to treat them this way as long as the 1040 form is accompanied by the 982 form and the correct box is checked.