Hello,

I put myself through college and law school with student loans and became disabled shortly after passing the bar and was unable to pay any of the $100,000 student loan ($200,000 with accrued interest). Because my disability was permanent, after 20 years of disability, the total $200,000 owed was discharged in the year 2011. My only income is and has been $980/mo SSDI. I never filed a tax return over the years because it's not required based on my income. I didn't file in 2011 because the discharge was conditional based on my not working over the following three years, which I didn't. I assumed it was taxable income in 2014 since that's when the 3-year conditional discharge period ended. Turns out the discharge actually was for the year 2011, for tax purposes, thus taxable income for that year.

My question is: I have never heard from the IRS on this loan discharge. Should I assume they don't know about the discharge? If I file a return for the year 2011, they will then know for sure. I don't have any assets to speak of, except a 2012 Corolla. No savings or retirement plan. I am single so no spousal assets. If I file for the year 2011, I would file an offer in compromise, maybe offering $500. But I'm tempted to do nothing since the IRS doesn't seem to even be aware of the debt forgiveness income for that year.

Thanks so much for any help on this matter!

My question is: I have never heard from the IRS on this loan discharge. Should I assume they don't know about the discharge?=========>> Some loan forgiveness programs are taxable and some are not. Under current law, the amount forgiven generally represents taxable income for income tax purposes in the year it is written off. Generally, student loan forgiveness is excluded from income if the forgiveness is contingent upon the student working for a specific number of years in certain professions. even if your student loan debt is canceled, even because of disability, expect a bill from the IRS. The agency considers forgiven debt of all kinds taxable income .So, there is no tax break for student loan debt that has been cancelled due to disability, despite the fact that borrowers who qualify for cancellation are considered totally and permanently disabled, and may never work again. In fact, the Department of the Treasury has specifically stated that student loans cancelled due to the Death and Disability Discharge are taxable; the insolvency exclusion, which requires debtors to be insolvent immediately prior to the discharge, may allow you to avoid paying taxes on some or all of the debt. Borrowers who can prove they were insolvent may be able to ease the tax burden, but may not be able to eliminate it. The insolvency , that is, their total liabilities exceeded the value of their assets,calculation is notoriously complex, particularly for people who are dealing with medical problems . The amount of taxable income can be reduced, but only to the extent of the insolvency.

If I file a return for the year 2011, they will then know for sure. I don't have any assets to speak of, except a 2012 Corolla. No savings or retirement plan. I am single so no spousal assets. If I file for the year 2011, I would file an offer in compromise, maybe offering $500. But I'm tempted to do nothing since the IRS doesn't seem to even be aware of the debt forgiveness income for that year=======>>it is your responsibility to file return whether or not the IRS knows it.I guess the IRS has more data about you; This does not mean everyone is under constant surveillance. But it does signal a new reliance on technology by the IRS to capture, analyze and use much more personal data. you need to contact the IRS for sure; the IRS would put a tax lien on your assets and may report her to the credit reporting agencies UNLESSS the debt is paid back. You can aske them, If you are not capable to work due to a medical disability to pay the student loan, are you supposed to work to pay the taxes? Borrowers who can prove they were insolvent may be able to ease the tax burden, but may not be able to eliminate it. And many people do not even know this exception exists. The insolvency calculation is notoriously complex, particularly for people who are dealing with medical problems or the death of a child, consumer advocates said, which is another instance in which student loan debts may be discharged.
The IRS has just completely modified their Debt Forgiveness Program which is called the “Offer in Compromise. The IRS has realized that taxpayers will never pay their tax debt off if there is no hope. With penalties and interest running faster than the speed of sound, IRS finally figured out it is far better to settle right now. An Offer in Compromise allows you to settle your tax debt for less than the full amount you owe to the IRS. It may be a legitimate option if you cannot pay your full tax liability, or in doing so creates a financial hardship. IRS will consider your unique set of facts and circumstances when determining settlements for IRS debt forgiveness.

Not able to pay the IRS back within 10 years looking at your future income, then the IRS Offer in Compromise program might be the right strategy to settle your debt.

My question is: I have never heard from the IRS on this loan discharge. Should I assume they don't know about the discharge? They know about the discharge IF the discharge was reported to them.

If I file a return for the year 2011, they will then know for sure. I don't have any assets to speak of, except a 2012 Corolla. No savings or retirement plan. I am single so no spousal assets. Here is what I would do. File the 2011 tax return, but put the discharge debt on form 982, and check the insolvency box. What insolvency is, is when your assets are less than your liabilities. Attach a spreadsheet listing all of your assets, and liabilities just BEFORE the discharge. Unless your assets are greater than the amount you owed for your student debt, you are done.

Hope this helps.