Debt forgiveness or cancellation occurs when a debt for which someone is personally liable is forgiven or satisfied for less than the full amount owed. When this occurs, the debt is considered to be cancelled or forgiven in whatever the amount that remains unpaid. Debt forgiveness has been significant in connection with the recent situations in the real estate market as house short sales, foreclosures and property abandonments usually result in the lender forgiving all or a portion of the outstanding loan balance on the foreclosed, short sold or abandoned property.
Debt that has been forgiven or cancelled is considered taxable income by the IRS and should be included in the person's taxable income. Banks and other financial institutions are required to report forgiven debt to the IRS once the forgiven amount is greater than $600. The form that is used to report forgiven or cancelled debt is known as Form 1099-C. The form is sent to both the IRS and the person who had the debt forgiven. There has been a lot of discussion over the past few years about loan modifications which can also result in a portion of the loan being forgiven as a part of the loan modification. This situation could also result in debt forgiveness income. Another situation that could lead to debt forgiveness income is the settlement of credit card debt for less than the full amount owed to the credit card company.

U.S. persons who include U.S. residents or Green Card holders and U.S. citizens are required to disclose certain foreign financial assets such as bank accounts, investment accounts and other foreign financial assets if the aggregate value of those accounts exceed U.S. dollar equivalent of $10,000 at any point during the calendar year. The form is referred to as the Report of Foreign Bank and Financial Accounts and is a separate filing from the U.S. tax return.
There is another required disclosure form known as Form 8938 - Specified Foreign Financial Assets. This form is filed with your individual tax return and is required generally if you have foreign bank and investments accounts with a value of $50,000 or more when combined at the end of the year.
In addition, U.S. persons that have a 10 percent or more ownership interest in a foreign corporation are required to file an information form known as Form 5471. This form is required to be attached to the U.S. person's individual tax return when filed.
Penalties
Penalties for failure to file the disclosure forms listed above can result in significant monetary and civil penalties. These penalties are as follows:
• Civil penalties for failure to report a foreign bank account can amount to $10,000 per violation.

The United States recently made another move to secure the regulations under the Foreign Account Tax Compliance Act (FATCA), which is to be implemented in January, 2014.
Earlier this month the website www.tax-news.com reported that on January 17, 2013, the U.S. Treasury Department and the Internal Revenue Service (IRS) issued comprehensive final regulations implementing the information reporting and withholding tax provisions for foreign financial institutions (FFIs), including those from the Caribbean region, under FATCA.
FATCA, passed by the U.S. Congress in March 2010, is intended to ensure U.S. tax authorities obtain information on financial accounts of over US$50,000 held by U.S. persons (permanent residents or citizens) or by foreign entities in which U.S. persons hold a substantial ownership interest, with FFIs, including commercial banks, building societies and investment companies. Failure by an FFI to disclose information would result in a penalty that would heavily tax their U.S.-source income.
FFIs can avoid this tax by entering an agreement with the IRS to identify U.S. accounts, report certain information to the IRS regarding U.S. accounts. Participating FFI's are required to register with the IRS through an online system.
In a statement announcing the final regulations, the Treasury Department said the final regulations mark a key step in establishing a common intergovernmental approach to combating tax evasion. The statement said, "These regulations provide additional certainty for financial institutions and government counterparts by finalizing the step-by-step process for U.S. account identification, information reporting, and withholding requirements for foreign financial institutions (FFIs), other foreign entities, and U.S. withholding agents."

The U.S. Department of the Treasury has reported that five million checks continue to be mailed to federal beneficiaries each month. However less than two months remain until the March 1, 2013, electronic payment law goes into effect for federal benefits to be paid electronically. As a result the Treasury Department is urging Social Security and other federal benefit recipients to hurry and switch now to either direct deposit or the Direct Express Debit MasterCard card.

"Choosing direct deposit or the Direct Express card makes it easier, safer and more convenient for beneficiaries to receive their payments. Switching to an electronic payment is not optional – it's the law," said commissioner of the Treasury Department's Financial Management Service, David Lebryk. "If you or a loved one still receives paper checks for your benefit payments, it's time to switch. It's free and easy."

Currently, approximately 93 percent of Social Security and Supplemental Security Income (SSI) payments are being made electronically. Converting the remaining paper check recipients to electronic payments will save American taxpayers $1 billion over the next 10 years.