If you negotiate away credit card debt, it’s possible that the bank that cuts you a break will issue a form 1099-C, which reports the amount of debt it canceled and could force you to pay more taxes. If you receive such a form, it’s a good idea to look it over and make sure it’s accurate. If it’s not, you may have a battle on your hands.
Credit.com (warning: annoying pop-up ad alert if you click through) walks you through the process of how to dispute the amount on your 1099-C. The first step should be to contact the bank that issued the form. If that doesn’t get you anywhere, you can speak to the IRS and ask how to proceed.
For the best chance of succeeding, come armed with documentation about your debt settlement, including correspondence with dates and figures. If you need more time to work things out, consider filing an extension.
Tax Help: How to Dispute A 1099-C Form [Credit.com (pop-up ad alert)] (Thanks, Michael!)