Issue: IRS assessing more taxable income from cancellation of debt
$$ at stake: over $9,600
Every time we are successful in defending a client’s case and especially winning them money, we get super ecstatic! In this case, the IRS agreed to remove the balance of over $9,000 to zero. Such a big win for the client (and us). How did we do it?
Exactly two years after the tax return due date, the IRS issued a CP2000 letter to the taxpayer, assessing cancellation of debt from two debtors, in the amounts of $3,500 and $26,000, totalling almost $30,000. With these additional income, IRS calculated additional income tax of $7,500. Not only that, the IRS also piled on penalty and interest, to a total of slightly over $9,600.
What can you get with $9,600?
Quite a lot, isn’t it? A nice, leisurely trip for a family to Europe for a week. Or, a down payment for a luxury car. That amount of money is enough for at least a few months worth of rent or mortgage payments.
What should we do when the IRS said that your payment is due only a month after sending you this scary letter?
Our client came to us, which is the right decision. We began by asking a series of questions…
Do you agree with the IRS assessments? No, we are confused why the IRS think we owe them money.
Have you ever had debts that were paid off, or restructured? Yes, we had debts that were paid off using a debt-consolidating company. These should not be taxed, since we paid them off, correct?
Yes, they’re absolutely correct.
We went back and forth a little bit with the taxpayers, got the necessary paperwork that proved that the debts were paid. It took slightly less than five months, but we finally got the IRS to agree that the balance due was removed. A big win!
Key takeaways from this case:
Keep important records.
Act fast. The IRS doesn’t wait for you. All taxpayers should act promptly upon receiving an IRS letter.