MW 'He's living in a sober-living house': My friend's $19K loan was written off. The IRS charged him $3K. Can he appeal?

By Quentin Fottrell

'He has only been able to make about $10,000 a year in menial jobs'

"He's been sober for about 3 years. Before that he was an alcoholic for about 40 years." (Photo subject is a model.)

Dear Quentin,

I've been trying to help my friend and brother-in-law with an IRS matter. He's been sober for about 3 years. Before that he was an alcoholic for about 40 years. A DUI precipitated his sobriety. His truck was repossessed and the loan of about $19,000 was written off. He is living in a sober-living house now and, since he can't drive a truck for a living anymore, he has only been able to make about $10,000 a year in menial jobs.

Recently, the IRS sent him notice that he owes $3,000 in taxes because the truck loan that was written off was considered income for that year and he owed taxes on it. He wasn't aware of that at the time. All to say, can you point us in the right direction as to what we can do about this? He only brings home about $600-$700 a month, so he can't afford payments to the IRS. What do people do who are at this poverty level and literally can't afford an IRS payment?

A Friend & Sister-in-law

You can email The Moneyist with any financial and ethical questions at qfottrell@marketwatch.com, and follow Quentin Fottrell on X, the platform formerly known as Twitter. The Moneyist regrets he cannot reply to questions individually.

A debt discharged in bankruptcy is exempt from taxes and/or if the person was insolvent when the debt was canceled.

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Dear Sister,

Your brother-in-law has been through a lot, and sometimes it takes a life-changing event for someone to find that moment of grace, which others might refer to as a "miracle," to finally look at their relationship with alcohol and realize that something needs to change. Not everyone reaches that point in life, so I hope he puts his sobriety before everything else now that he's on this new path. He was given a similar gift of grace when this debt was written off. And now, I hope, some good news: A debt discharged in bankruptcy is exempt from taxes and/or if the person was insolvent when the debt was canceled.

There may be a chance for your brother-in-law to avoid this tax. According to the Internal Revenue Service: "If you are insolvent when the debt is cancelled, some or all of the cancelled debt may not be taxable to you. You are insolvent when your total debts are more than the fair market value of your total assets. Insolvency can be fairly complex to determine and the assistance of a tax professional is recommended if you believe you qualify for this exception." (Form 982 is used to report the exclusion of discharged indebtedness from gross income and the reduction of certain tax.)

Massey and Company, a CPA firm with offices in Chicago and Atlanta, has more details on avoiding such tax and various types of debt through insolvency. "Understanding the implications of canceled debt is crucial because it can significantly impact your taxable income," it says. "For instance, if you had a $10,000 credit-card debt that was forgiven, this amount might be considered as part of your taxpayer's gross income, potentially increasing your tax liability. However, there are exceptions, such as the insolvency exclusion, which can help reduce or eliminate the tax burden from canceled debt."

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Limits to using insolvency

There are also limits to using insolvency. "Insolvency can reduce but not entirely eliminate your tax burden," Massey and Company notes. "Debt forgiven beyond the insolvency threshold is still taxable. For instance, if $50,000 in debt is canceled but you are only insolvent by $30,000, the remaining $20,000 is taxable income. Additionally, foreign tax credits are among the tax attributes that may be reduced when excluding canceled debt from gross income. Knowing how insolvency impacts taxable income from canceled debt is vital to avoid unexpected tax liabilities and financial strain."

There are other issues that determine if the canceled debt is tax exempt. "Fair market value (FMV) plays a crucial role in determining the tax implications of canceled debt," the CPA firm adds. "FMV is the price that a willing buyer would pay for an asset in an open market. When a debt is canceled, the lender or creditor may report the FMV of the asset securing the debt as the amount of debt forgiveness. However, the taxpayer may be able to exclude the canceled debt from their taxpayer's gross income if they can demonstrate that the FMV of their assets was less than the amount of debt forgiveness."

Good luck to your brother-in-law in his new life. Now that he can't drive anymore, I hope new doors open up to him, allowing him to have purpose and regain his financial independence.

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The Substance Abuse and Mental Health Services Administration, a branch of the U.S. Department of Health and Human Services, aims to help families dealing with addiction issues. You can call SAMHSA's National Helpline at 1-800-662-HELP (4357) or TTY: 1-800-487-4889, or text your zip code to 435748 (HELP4U), or use SAMHSA's Behavioral Health Treatment Services Locator to get help. Read more here.

The Center for Motivation and Change published this book, "Beyond Addiction: How Science and Kindness Help People Change" by Carrie Wilkens, Jeff Foote and Ken Carpenter.

More columns from Quentin Fottrell:

I met a friend for lunch. When the check arrived, she said, 'Thank you so much for paying!' Was I taken for a fool?

'She has been telling him lies': My sister convinced my father to sign everything over to her. What can I do?

My father died, leaving everything to my 90-year-old stepmother. Do I have a right to ask her if I'm in her will?

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-Quentin Fottrell

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September 26, 2025 10:00 ET (14:00 GMT)

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