Is cancellation of debt considered taxable income on taxes?

March 23, 2021 by Carolyn Richardson, EA, MBA
Cancellation of Debt (COD) Income

I wasn't notified of any cancellation of debt when filing 2018 taxes, Is cancellation of debt considered income? Also, when comparing my 1040 Tax return there are discrepancies and IRS isn't taking any call. Need Help.


Hello Donna,

Thank you for contacting TaxAudit with your question about cancellation of debt (COD) and whether that is income.

It sounds like you may have received a notice from the IRS, very likely a CP2000 notice, asking why this income reported on Form 1099-C is not reflected on your return. Of course, the short answer is yes, this is taxable income. Unfortunately, when you are relieved of debt through the cancellation of debt, that amount is considered to be income to you, even though you did not receive cash. The reason for this is because of an accounting rule that says that your “net worth” is the total of your assets less your liabilities. If your liabilities drop because a debt is cancelled, this increases your net worth. And an increase in your net worth is income.

In some cases, you may be able to claim that the COD is exempt from taxation. The most common situations where this can be done is when the COD is generated because of a foreclosure or mortgage renegotiation on your personal residence, you are in bankruptcy, or you are insolvent at the time the debt is cancelled. To claim that one of these situations applies to you, you should review the instructions for Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, and complete the Form 982 to send to the IRS in response to your notice. You can find more information about this form here. You should also review IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments here. This will provide you with more information on COD income. If you are claiming to be insolvent, you may need to provide the IRS with an estimate of your assets and liabilities as of the date of the debt discharge.

If you have an audit defense membership with TaxAudit for tax year 2018, you can report this notice to us by calling 800.922.8348, and one of our friendly customer service representatives will be happy to help you. 

You mention seeing discrepancies when you compare your return copy to the notice’s figures. The IRS may have made other changes to your return that you were not previously notified about. The best way to resolve this is to go to the IRS website ( and click on the “Get Your Tax Record” option on the main page. You will need to register for the site and, to do so, you must provide your social security number, date of birth, filing status and mailing address from your last return, your email address, and then provide a mobile number that is linked to your name (so they can send you an activation code via text). You may also want to have information from some of your credit accounts, such as a credit card, car loan, or mortgage, as the system will ask you questions regarding these to verify your identity. Once you have registered and can get into the system, request a Return Transcript or Record of Account transcript for 2018. By registering, you can obtain the transcripts electronically. They can also be requested by mail if you cannot validate your identity in the system, but this option may take several weeks to get to you by mail. These transcripts will show your tax return numbers, both as you reported them and as the IRS recalculated them. The Record of Account will also show any other actions that the IRS has taken on your tax account for that year. Hopefully, that will let you determine where the discrepancies lie and what caused them.

Best wishes,
Carolyn Richardson, EA

Tags: COD, CP2000, debt



Carolyn Richardson, EA, MBA
Learning Content Managing Editor


Carolyn has been in the tax field since 1984, when she went to work at the IRS as a Revenue Agent. Carolyn taught many classes at the IRS on both tax law changes and new hire training. In 1990, she left the IRS for a position at CCH, where she was a developer on both the service bureau software and on the Prosystevm fx tax preparation software for nearly 17 years. After leaving CCH she worked at several Los Angeles-based CPA firms before starting at TaxAudit as an Audit Representative in 2009. Carolyn became the manager of the Education and Research Department in 2011, developing course materials for the company and overseeing the research requests. Currently, she is the Learning Content Managing Editor. 


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