My car was repoed & now owe the IRS money?

-In 2009 the bank repoed a car I finaced for my scumbag of step father and he never paid. The car was repossed, I owed money on the loan. The car was sold at an auction and after that I still owed money. The bank sold the debt to a collection agency, who then I settled with and payed the lump sum. NOw I get a letter from the IRS saying my reported income was less than what they see, which I believe is wrong they are showing the amount I payed to settle as income is this possible? I didnt earn this I payed the bank this amount? Now they are charging me $1300 saying I owe that tax. What can i do any one have an idea whats going on? I dont want them to think this was money i earned when I'm still paying for the amount I settled.When you settled the debt for less than the total that was due, the difference became cancelled debt income. You were supposed to get the 1099-C in 2009 (and the IRS obviously did). You can exclude the money from income if you can show you were insolvent at the time. If you can't, you owe.Call the toll free number that appears in the upper right hand side of the letter your received from the IRS. About 70% of the computer produced notices they send out are in error; you will have to ask exactly what paperwork you will have to fax to them to show the money as an expense and not as income. I have a saying that really has come true in this high tech age; "We are surrounded by idiots and now they have computers". You will come out all right on this so don't get bent out of shape.
What happened was that the bank reported the amount you paid as a charge-off. If the debt was a charge-off, this is money that the IRS treats as income (money you owed but are no longer required to pay). However, since you did pay this amount (I assume you paid the full difference), the it should not be counted as income. Call the IRS - you may be required to submit copies of your receipts showing you paid off the entire debt.
When you settle, you pay less than what you owe. The difference (the amount that you avoid paying by settling instead) is income.



The amount that you did pay is not income.



The amount that you owed and did not pay is income, by law. And you do owe tax on it.
You owe tax for cancellation of debt, for tax on the amount that you owed but did not pay when you settled. You should have gotten a form 1099-C for the amount.
If you have "forgiveness of debt" that is considered income. It is really lousy since you get a doubt whammy on this one.
you probably received a 1099 C, cancellation of debt, and that is considered income to you
Pickup the phone and call the IRS, and write to them certified letter. The IRS MAKES PLENTY OF MISTAKES.