Where Cancellation of Debt Income (CODI) Meets Tax Representation
Cancellation of Debt Income–The Problem
This post is the second in a series of posts I am putting together to discuss some of the major topics from the National Taxpayer Advocate 2008 Annual Report. You can read more from my previous post about the ineffectiveness of increased enforcement action from the IRS and Nina Olson’s observation that taxpayers have a better chance of winning cases when they seek tax representation.
The Cancellation of Debt Income (CODI) topic is an interesting one because it exemplifies what we see so often with the IRS. Tax Masters has been in business for almost a decade and, while the specific tactics and issues change, we have seen the IRS maintain the same basic strategy for collecting revenue for the U.S. government. We have seen time and again that the IRS, from top to bottom, will use aggressive collections tactics and the complexity of the IRS Code to their advantage.
CODI is not a new concept, but it is one that Olson estimates will effect tens if not hundreds of thousands of taxpayers because of the economic downturn. Many of these taxpayers have no idea how to claim debt cancellation or forgiveness as anything other than taxable income, and others may not claim it at all. Lenders are required to report CODI to the IRS using Form 1099-C, and the IRS assumes the reported amounts to be taxable unless the taxpayer files a particular form to exclude the income from taxes.
CODI Leads to Back Taxes, Substantial Tax Debt, IRS Audits
A particularly bothersome aspect of this entire situation is that the IRS, the media, and no one else seems to be very interested in telling taxpayers about their ability to exclude at least portions of debt forgiveness income from their taxable income. So the person who can’t pay her mortgage files her taxes only to see that she owes $10,000 or more after going through foreclosure in 2008. And if she doesn’t claim the income, she gets a friendly reminder from the IRS in 2009 or 2010, just as she’s getting back on her feet financially, that her return was adjusted and she now owes $18,000 in back taxes, interest, and tax penalties.
Tax Representation–The Way Out of IRS Tax Debt
If the IRS doesn’t take Olson’s advice to fix this issue, they are setting up a huge swell of taxpayers who will need tax representation over the next several years. And using a quality tax representative will be the most effective way to ensure that you don’t wind up owing more than you have to. If you have any debt forgiveness from 2008, we strongly encourage you to have a qualified tax CPA or tax professional prepare and help you file your taxes and the debt exclusion form. If you don’t handle this correctly now, you will be calling Tax Masters later and you will already owe the IRS thousands.
Past Tax Years–Call Tax Masters
If you are already in this situation and have CODI from past tax years, call Tax Masters today and talk to one of our tax consultants about how to refile to claim the exclusions you qualify for. Odds are we can get some of that money back for you if you claimed the CODI as income. And if you didn’t claim the income at all, it’s a matter of time before the IRS contacts you with an adjusted return or notice of audit. It’s always better to beat the IRS to the punch, particularly now when IRS agents and revenue officers have the authority to waive penalties.
In the meantime, we beg the IRS to listen to Olson’s advice on this. The people that will be hurt by CODI are those who can least afford the unnecessary additional tax burden. We don’t want to gain business based on an exclusion that’s not being used simply because the IRS won’t tell taxpayers it’s out there. Unfortunately, this just looks like par for the course.
Until you need us,
Patrick Cox, Tax Masters
Mr. Cox,
My daughter is in the service and is currently stationed at Camp Anaconda in Iraq . It came to our attention recently that she has more than one unfilled tax return. Is this something that can wait until she gets back as long as she files her 2008 return this coming year?
Hello Patrick Cox.
I recently completed a reivew of TaxMasters along with several other IRS tax relief companies and I think you might like the results. Check it out at http://taxreliefreview.blogspot.com/.
Best,
Jenna Kent
IRS Tax Relief Fox
Elisa,
First of all, I’d like to thank your daughter for her service to this country. My thoughts are with her and the thousands of soldiers still in Iraq, Afghanistan, and other locations around the world.
To answer your question specifically, make sure she files her 2008 return or sends in IRS Form 4868 to file an automatic extension if she needs it. As for the back taxes, unfiled returns can turn into a mess. The best thing you can do is to file all past-due tax returns as soon as possible. It’s always better to act before the IRS contacts you or your daughter. They’ll file what’s called an SFR (substitute for return) on her behalf, which never includes deductions. In other words, she’ll wind up owing more than if she files the past-due returns on her own. And even if the IRS already has an SFR on file, she can still file an amended return to claim her deductions. Give us a call and talk to one of our tax consultants about the best way to handle this. We’d be glad to help out.
Laid off in 2002 at age 59, unable to find decent job, worked in warehouse with concrete floors. Health deterioriated due to stress of trying to exist and make credit card payments;hospitalized several times. Entered into debt resolution proces with four banks. Withdrew $38750 from IRA 2008 to settle with four banks–ruined credit rating. Received $28,594 on 1099C “Cancellation of Debt Income,” (show me the income part please; if I couldn’t afford to pay then, how can I come up with income tax money?????????????0. AGI for 2008 up $66K; owe $15,935 to IRS plus $4,603 to Ohio State. Senior citizen (66) living on fixed income, can’t afford to pay this., IRS depleted mostly to pay credit card companies. Have $5,000 saved to help pay this “unjust taxation.” Need help. Tax returns completed but not sent in.
Ronald, you should have already been contacted. Comment back in if you have not been contacted by one of our tax consultants. We can help you through this.