IRS Sample Letter 1

Debt Cancellation

Use irs sample letter 1 to seek debt cancellation and reduce taxable income. Canceled debt is passive income subject to deduction from gross income. If you were insolvent immediately before issuance of form 1099-C, and remained insolvent immediately after, you can get the canceled debt amount removed from your gross income.

The date of cancellation is most important. It is determined by the issuance date of form 1099c.

In some cases, foreclosed assets converted to cash can create taxable income for a foreclosing lender. In order to get a deduction, or write off, the lender must issue form 1099-C. The debtor [you] must then communicate insolvency with irs to get a canceled debt deduction from gross income. The sample letter below communicates an insolvency condition that existed immediately before and immediately after the issuance date of form 1099-C.

Your letterhead name, address and phone number


Internal Revenue Service
Attn: Under-Reporter Compliance Unit
IRS Service Center address

Re: Your name & SSN or tax id number
1099-C, XYZ Financial
1040 2007

Dear Sir/Madam:

This responds to your notice that says I did not report a canceled debt as income, copy enclosed. I went through bankruptcy and did not report a canceled debt benefit I received from XYZ Financial in the bankruptcy proceeding.

Enclosed is a notarized statement delineating assets and liabilities belonging to me before and after I filed a bankruptcy petition. I was broke [insolvent] before 1099-C was issued, and I was still broke after the 1099-C was issued. The statement below reflects my assets and liabilities summarized as follows,

1099C, $10,000
Other assets at FMV, $20,000
Total debts, $30,001

Please deduct the 1099-C amount from my gross income for the year 2007.



An insolvency determination is key to deducting debt cancellation from gross income. If the cancellation of a debt has no positive affect on insolvency [negative net worth], then the canceled debt qualifies as a deduction from gross income.

The lender legitimately "passed the buck" onto you to defend himself. You must now defend yourself with a hand-made tax tool. The hand-made tool is a notarized statement of assets and liabilities that exists both before and after form 1099-C was issued.

Remember, the letter is useless without a notarized statement of assets and liabilities.

Pose a tax question to us about gross income that includes a canceled debt.

Return From Debt Cancellation To IRS SAMPLE LETTERS