Generally speaking, I’ve forgiven or canceled loan is taxable income to you, because you received money and did not pay taxes on it when you borrowed it. Since you don’t have to pay it back, that becomes taxable income to you.
However, the paperwork or may not be correct. I assume you received a 1099 – C form from the bank, or the IRS received a copy even if you didn’t. Your first step is to get a copy of the 1099 – C form and see exactly what it says. You may owe less than the IRS thinks.
Were you in bankruptcy when the loan was canceled?
Be aware there are strict time deadlines for responding to an IRS letter. If you don’t respond by the deadline, then the IRS assumes you owe the full tax and you lose your right of appeal.
