Can the IRS hold up refunds that would be paying my child support because of our bankruptcy? 3 Answers as of January 30, 2012

Whenever a debt is cancelled by the lender voluntarily or by court order, the amount of the accumulated debt will probably be treated as income to the person or people who were liable on the debt. The lender is obligated to send an IRS Form 1099-C to those who were liable for the debt by January 31st of the year after the debt was cancelled. If you were not liable as a co-signer on the mortgage, you may be able to file for Innocent Spouse relief. You should see a tax attorney to discuss your situation.

Losing your home in Bankruptcy means that your mortgage debt was forgiven. Generally, this generates taxable Discharge of Indebtedness income. However, if you can show you were insolvent at the time you lost your home, this will not be considered taxable income.

It sounds like what they are referring to is what is known as forgiveness of debt income. If the bank foreclosures for less than what was owed on the loan at the time, the difference between what the property sells for and what the loan amount was is income to you, since you no longer have to pay the debt but got the money to buy the house. Many lenders will send a Form 1099 to the IRS with the amount if the difference and the IRS will assess taxes based on this Form 1099. If the bankruptcy occurred before the foreclosure, then the debt to the mortgage company was discharged in the bankruptcy. Debts discharged in bankruptcy are not income under the Internal Revenue Code and would not be income to you. If that occurred and the IRS is reassessing the tax, the IRS needs to be shown that the debt was included in the bankruptcy and they will readjust. If not, then you have an additional tax liability and the IRS can intercept refunds to pay the back taxes.