Internal Revenue Service United States Department of the Treasury
Level Basic Advanced Military International

Cancellation of Debt (COD)

Cancellation of Debt—Basics

Cancellation of Debt Issues in Scope for VITA/TCE

A debt includes any indebtedness for which a taxpayer is liable or which attaches to the taxpayer's property. Cancellation of indebtedness can involve auto loans, credit card debt, medical care, professional services, installment purchases of furniture or other personal property, mortgages, and home equity loans. Generally, if a debt for which a taxpayer is personally liable is canceled or forgiven, the taxpayer must include the canceled amount in income. There is no income from canceled debt if the cancellation or forgiveness of debt is a gift or bequest.

Only two types of cancellation of debt issues are in scope for VITA/TCE:

  • Qualified principal residence debt, and
  • Nonbusiness credit card debt

Publication 4731, in Volunteer Resource Guide (Income Tab), provides step-by-step guidance for the volunteer tax return preparer to determine if the cancellation of debt is within scope.

  • Use Part I for taxpayers with Form 1099-A for a foreclosure or abandonment of their principal residence
  • Use Part II for taxpayers with Form 1099-C, or Forms 1099-A and 1099-C resulting from cancellation of debt on a home mortgage loan
  • Use Part III for taxpayers with Form 1099-C resulting from cancellation of credit card debt

For all other cancellation of debt issues, refer the taxpayer to a professional tax preparer.

Caution

The qualified principal residence debt provision is subject to change. See the current Publication 4491X for any updates.

A home and a credit card.