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John Oliver gives away medical debt without triggering taxes

In the latest episode of HBO series “Last Week Tonight with John Oliver,” the host created a company and bought approximately $15 million of consumer medical debt for pennies on the dollar. He then relieved 9,000 of their old medical debts.

This television giveaway drew attention to the ease of entry into the debt collection business. Collection tactics have become very aggressive as more organizations outsource debt collection. Even Federal agencies like the IRS have run pilot programs with private collectors.

Even if you did not benefit from the John Oliver giveaway, here are several ways to deal with past due debt. Remember that debt forgiveness often comes with tax consequences.

Legitimate versus scam

When contacted about an old debt, Money magazine recommends requesting written confirmation of the debt. This is one of your rights under Federal law. It will also ensure that you are not talking to a scammer.

The IRS has warned of a number of scams this year that involve callers who claim to be IRS agents. They demand the immediate payment of back taxes or threaten to send local police. It is important to recognize that the IRS does not contact taxpayers out of the blue and will always send a letter with a notice of deficiency first.

Statute of limitations: Can the debt still be collected?

Researching the statute of limitation is also important. When too much time has passed the collection agency may no longer have the right to pursue you.

If dealing with back taxes, the IRS generally has 10 years to collect back taxes.

Taxes owed on debt forgiveness

If you can verify that the debt is real and the person you are talking to is legitimate, you may still be able to negotiate a settlement. What if 40 percent of your medical debt is forgiven in exchange for a lump sum payment?

This is where the tax issue creeps in. The collection agency will send a 1099-C reporting any cancelled debt that is more than $600. The IRS gets a copy of the form as well. If you fail to account for the forgiven debt on your tax return, you could receive an unpleasant surprise and owe a significant tax bill.

In John Oliver’s case, he worked with a non-profit organization RIP Medical Debt. The website stated that “forgiveness of the debt does not result in income to the debtor if forgiveness is a gift that comes from a detached and disinterested generosity. We will not file a Form 1099-C with the IRS.” It is unlikely that other collection agencies would be this considerate.

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