A friend’s $19,000 loan was written off due to a DUI, but the IRS charged them $3,000 in taxes. The friend has limited income ($10,000/year) and can’t afford the payment. To avoid this tax, they may be able to claim insolvency, which excludes some or all of the canceled debt from taxable income. However, there are limits to using insolvency: if the amount forgiven exceeds the insolvent threshold, it’s still taxable. The fair market value (FMV) of the assets securing the debt also plays a role in determining tax implications.
To qualify for this exemption, the taxpayer must demonstrate that their total debts exceed the FMV of their total assets. A tax professional can help determine insolvency and calculate the exclusion from gross income using Form 982.
Source: https://www.marketwatch.com/story/my-brother-in-laws-19-000-truck-loan-was-written-off-but-the-irs-charged-him-3-300-in-taxes-this-seems-unfair-f09f6d6c