Yes, the IRS requires that you add the 1099-MISC to your income taxes. You might consider it unfair that a debt you successfully cancel or negotiate away comes back to haunt you as taxable income. However, the IRS classifies cancelled debt as income because you received a payment you didn't return.
According to the IRS, nearly any debt you owe that is canceled, forgiven or discharged becomes taxable income to you.
Even if you receive a Form 1099-C from a lender, you still may be able to avoid taxation on the forgiveness of a debt. If your debt was discharged in a Title 11 bankruptcy proceeding, such as a Chapter 7 or Chapter 13 case, you're not responsible for taxes on that debt. However, the IRS still requires that you enter the 1099-MISC on your tax return.
If you can demonstrate to the IRS that you were insolvent at the time the debt was cancelled, you can similarly avoid taxes on that debt. Certain other types of debt, including qualified farm indebtedness and qualified real property business indebtedness, can also avoid taxation in the event of cancellation.
For more information please visit: https://www.irs.gov/taxtopics/tc431.html
