16 Mar Tax Fact 7-IRS Form 982 is Important
The IRS wants you to know, in Tax Fact 7, that you must use Form 982 in order to claim that forgiven mortgage debt should not be included in your income for tax purposes. IRS Form 982, entitled â€œReduction of Tax Attributes Due to Discharge of Indebtednessâ€ must be attached to your federal income tax return for the tax year in which the qualified debt was forgiven. Despite the lengthy and confusing form name, the form itself is only one page long. It comes with detailed instructions that have examples of how the form should be used. Form 982 can be found on the IRS website.
If you have cancelled debt and do not file a Form 982 with your tax return, or do not otherwise report the income from mortgage debt forgiveness or other cancelled debt on your tax return, the IRS may write you a letter and propose the assessment of additional tax. A failure to respond to such an IRS letter within 30 days will result in an issuance of a Statutory Notice of Deficiency, and the assessment of additional tax. Look for my article on responding to IRS notices for what you need to do if the IRS tries to tell you, you owe more tax.
The business about tax attributes is serious. While the Mortgage Forgiveness Debt Relief Act of 2007 does give a foreclosed homeowner the ability to exclude certain types of cancelled debt from income, there can be a price to pay. For this reason, and many others, it may be appropriate to consult a tax professional if a foreclosure occurs in the year for which the return is being prepared. Watch out for a 1099-A and/or 1099-C from the lender indicating that debt was cancelled.
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