How will I know when a bad debt is considered income by the IRS?

Read carefully because this is subtle: The expiration of the statute of limitations for suing you does not mean you don't owe the debt, just that the creditor can't enforce payment. You still owe it and it won't drop off your credit report for years unless you pay it or settle it for less than 100 cents on the dollar. If you settle, the creditor will issue Form 1099-C for the discharged amount. Whether the statue of limitations for suing you has expired or not, this means the creditor has given up all rights to collect the balance and your debt is now zero. The creditor is not going to do this on a debt where the statute of limitations has expired unless you pay something because there is no advantage to discharging a debt for zero. The only club the creditor has is keeping the bill on your credit report. If leaving the debt open on your credit report causes no pain, do nothing. If you find there is an advantage to having it off, you will have to consider the costs which are the percentage you have to pay plus income tax on the discharged amount.

When a creditor writes a debt off as uncollectible they must send you a Form 1099-C for the canceled debt. The year on the 1099-C is the year that you report the COD as income.

You can avoid the COD income if you are insolvent at the time of the cancellation. That may require some professional assistance to substantiate though as you have to prove that your debts were greater than the value of everything that you owned.

IRS would only know a bad debt was a bad debt by notification of the creditor

you apparently didn't receive the 1099 C or didn't know what it was if you did

and yes, those will be considered income to you

If your creditor sends you a 1099C (cancellation of debt) then you need to report it as income and pay the taxes due.

Or, just pay your bills and you don't have to worry about this at all.