Taxes

What Do I Do With This IRS CP2000 Claim I Owe Tax On a Cancelled Debt?

Written by Jim Buttonnow

Question:

Dear Jim,

I received a CP2000 concerning a bank cancellation of debt, this was due to insolvency. I did not know I had to file this on my 2018 tax return because I honestly do not remember receiving it. The total due is over $2000 in taxes after IRS computed calculated adjustments.

I would not have a disagreement payment, but I am still upside down and would definitely need a payment plan. Basically liability, including student loan for this time period, $146,485. This amount includes the canceled debt of $10,138.

Assets, including blue book on my car I had financed, computer, cash in the bank and misc is $5320. Still owed $15000 on my car.

I looked at form 982 and checked in Group I, 1b, 2-is this for the cancellation of debt or difference in cancellation of debt and other liability? [$146,485 – 10,138]

From what I have read I also place a figure in Group III, item 10a, but I do not know the formula for this calculation. Can you please assist?

Thank you

Deanna

Answer:

Hi Deanna:

Your CP2000 proposed tax assessment is very common- and if you are insolvent (i.e. your liabilities exceed your assets by more than the debt forgiven at the time the debt is written off), you will just need to respond to the IRS and show your insolvency.

If you are insolvent (your net worth at the time of the discharge is greater than the debt forgiven), here is what you need to do:
1. Prepare a response package to the IRS consisting of the following:
The cover letter that explains that you are insolvent (that is, your debts exceeded your assets at the time of the debt forgiveness)
CP2000 response form (included with the IRS letter) that states “you disagree” with the IRS proposed assessment

A Form 982 with completed Part 1 (checkbox 1b and put the amount of the debt on the 1099-C in box 2)

READ  My Mother Passed Away But Received 1099-C in Error

A short “balance sheet” at the time of the discharge that shows your assets and liabilities at the time of the discharge and how you have “negative net worth” – here is an example of a 2017 tax year that shows a balance sheet with negative equity:

From this example, the taxpayer has negative net worth of ($45,687) as of the date of debt discharge (2/10/2017). The taxpayer can exclude up to $45,687 reported on Form 1099-C.

Include a copy of your CP2000 notice.

You should FAX this package to the IRS to the fax number listed on the CP2000. This will get your response quickly into the IRS’ workstream (also, due to the COVID-19 pandemic, the IRS is not processing its mail but they are accepting faxes).

I hope this helps. Let me know if you have any issues.

Jim

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About the author

Jim Buttonnow

Jim Buttonow, CPA/CITP, practices in the area of IRS and State tax controversy. He has more than 29 years of experience in IRS practice and procedure. Reach Jim at [email protected] or through his website www.buttonowcpa.com

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