Debt Settlements and Short Sales- watch out for the hidden tax bill !

Whenever a debt is settled for less than the full amount owed, there is a potential for what is called Debt Discharge Income. In essence, the amount by which your debt is discharged, except in bankruptcy, can become income to you and has to be reported by you. We have warned clients and fellow professionals to watch out for this. In April 2010, the IRS issued Publication 4681 for tax year 2009 covering all the rules and exceptions. They are complex but this article does a pretty good job of explaining them. Here is the Link IRS Publication 4681. If you are in this situation, consult with your accountant or tax adviser.

This is important for clients to be aware of when they engage in short sales or deeds in lieu or any settlement outside of bankruptcy where they get part of a debt forgiven. Just as important, if you are advising such people, make sure you warn them and document that you did!

IRS CIRCULAR 230 DISCLOSURE:  Pursuant to Treasury Regulations, any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used or relied upon by you or any other person, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any tax advice addressed herein.