After you file

Here's what is supposed to happen.

Suppose you borrow $20,000 to buy a car, and you stop making payments when you still owe $15,000.  The bank repossesses the car and sells it at auction for $8,000.  You owe a $7,000 deficiency, plus fees and interest.  The bank puts it in collection for a few years, then gives up and writes it off.  The written-off amount is $8,500 balance plus fees and interest.  

That amount is taxable income to you, because you borrowed it, didn't pay tax, and are now getting to keep the money and not pay it back.  The bank issues a 1099-C for the amount of the canceled debt.  The date on the 1099-C is the date of an "identifying event" that specifies when the debt was canceled.  The bank mails you the 1099-C and sends a copy to the IRS.  If you didn't get the 1099-C, maybe you moved and the bank didn't know your address.  You can get a transcript of it here (ask for a wage and income transcript) https://www.irs.gov/Individuals/Get-Transcript

The canceled debt is income in the tax year that it was canceled, and you will need to file an amended return to report the income and pay tax.

If the debt was canceled due to bankruptcy, it is not taxable, but you have to report it on your tax return and claim the exclusion for bankruptcy.  If you were insolvent when the debt was canceled (owed more total debts than you could reasonably pay back) you may also be able to exclude the income and pay no tax, but this requires a special worksheet that Turbotax does not support, you may want to see a professional. https://www.irs.gov/forms-pubs/about-publication-4681

If the bank issued the 1099-C for the wrong amount, you still owe tax but less than the IRS says.  Prepare an amended tax return listing the actual amount of canceled debt, and mail the amended return, a check for payment, and a letter of explanation, to the office that sent the notice.  Also include copies of your loan, letters from the bank, and other proof that the canceled debt was less than the bank reported on the 1099-C.

Amend https://ttlc.intuit.com/replies/3288565




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