Imputed income questions are the most asked questions about debt forgiveness because they can be very confusing.
The Internet is a very valuable and influential tool but needs to be used with carefulness. Many Americans are reading information concerning subjects written by people in blogs and websites that have not been researched or based on facts. This becomes one of the major problems for some people who are searching for truth because as the old saying goes, "if lies or misinformation are repeated enough they eventually will be viewed as truth."
The classic articles found online about debt settlement concerning the IRS mentions the "fact" that you will receive a 1099-C and "will" pay income taxes on the amount forgiven as ordinary income. This is true in part but may not the case. What appeared in IRS articles mostly was the declaration on debt forgiveness and it was typically not presented properly.
There are many reasons this is reported this way; typically it comes down to one of two reasons. First the author is just passing on half-truths because they didn't know or didn't care to research the subject. Second the author is using the tax issue to get you to use another method that he or she may be promoting other than debt settlement.
The only truth is right from the "horse's mouth" the IRS. However, many people have no clue where to begin looking and soon become overwhelmed, they cease searching only to trust what they have heard or had read without getting the complete facts.
IRS Section 6050P refers to debt forgiveness. The IRS has specific section code that organizations are required to file with the IRS and which are not. The November 2004 IRS bulletin gives the final review of 6050P and explains the requirements for discharges of indebtedness by organizations that have a significant trade or business of lending money.
Note it's important to recognize that the IRS clearly defines in this bulletin what organizations fall under this class. They also included a section concerning debt buyers, (collections companies). Page 786 mentions there are three harbors safe under which companies will be considered not to have a significant trade or be considered in the business of lending money.
Article comments for the IRS first mentioned the subject of debt acquisition other than from the debtor, in other words the organizational debt collector buying the debt from creditor or credit card company. The commentators seemed a bit confused because of an early proposed regulation 6050P-2(e) which says the debt buyers are considered moneylenders.
The regulations in a 2004 bulletin attempted to clarify the questions about the responsibility of debts for income on debt forgiveness on debts acquired from the debtor or any person other than the debtor when they are subject to reporting under 6050P(c)(2)(D) of the tax code, if the owner of the obligation (debt buyer) is engaged in a significant trade or business of lending money. The majority of debt buyers are just that, "debt buyers" not lenders of money.