My credit union agreed to forgive $3,000 on my loan, but then reported it to the IRS. Now I have to pay taxes on it. Can the credit union do this?

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Yes. You most likely received an IRS 1099-C (Cancellation of Debt form) that showed the $3,000 as income to you. Under the IRS code, the cancellation or forgiveness of loans is generally considered income to the borrower. The lender must report that income to the IRS, and you have to pay taxes on it.