One of my clients just received a CP2000 for TY 2010, that lists 2 items of cancelled debt that they did not report on their tax return because they were insolvent. There were actually 6 items of cancelled debt but at this point the IRS is only questioning 2 of them. My question is, when preparing a response would it be best to only address the 2 items in question, or should I address all of it including the items that have not as of yet been questioned. These people really were insolvent at the time the debt was cancelled (and still are) so no one is looking to hide anything, I'm just not sure if I should be providing information that wasn't asked for. Also, as I have never dealt with this issue before; I'm wondering what information the IRS will require to substantiate their insolvency. Will the worksheets used at the time be sufficient? Thanks in advance for any help/opinions on this subject.
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Form 982
If Form 982 didn't get transmitted with their return, you probably need to fax that to the IRS. If the IRS already has that form, then ask them what worksheets, documentation they want to see. -
Agree. One client had to send in the worksheet showing assets and liabilities.JGComment
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To answer one of your original questions, it has always been my practice when responding to an IRS inquiry ... whether it arises from correspondence or during an office or field audit ... to furnish only the information requested and reply only to the questions asked. Thus, I would advise my client in a situation like you described to address only the two COD amounts specified in the CP2000 letter.
Form 982 should have been filed with the taxpayer's 2010 return. Forms 1099-C should never be ignored, because as you can see the IRS's matching program now catches them ... well, some of them anyway.Roland Slugg
"I do what I can."Comment
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I agree with Roland, but.....
I agree with Roland on this one, but....I would also submit a separate 4506T for a W2 and other income transcript for that year. That way you can see if the new IRS Automated Under Reporting (AUR) system is going to catch up with the other 1099Cs eventually or not.
The new AUR system is generating a lot of CP2000's that are getting crossed up with other things in the works at the IRs because the AUR system is not fully integrated yet. I talked to my local auditor the other week and she says they are driving them nuts because the audit division will be working on something and have it under control and the AUR system just keeps searching and generating multiple letters for the same thing.Comment
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