Tax Administration:

Information Returns Can Improve Reporting of Forgiven Debts

GGD-93-42: Published: Feb 17, 1993. Publicly Released: Mar 19, 1993.

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Pursuant to a congressional request, GAO reviewed whether the Internal Revenue Service (IRS) should require lenders to report taxpayers' forgiven debts, focusing on the potential effects on voluntary compliance if the Federal Deposit Insurance Corporation (FDIC) and the Resolution Trust Corporation (RTC) were required to report forgiven debt information to IRS.

GAO found that: (1) in 1986, 1 percent of taxpayers who had not received information returns from FDIC and RTC voluntarily reported FDIC-forgiven debt and 48 percent of taxpayers who had received information returns voluntarily reported forgiven debt; (2) 20 percent underreported the forgiven debt income and owed additional taxes, 12 percent did not underreport income and did not owe additional taxes, and 20 percent may have underreported income but were not pursued because of limited IRS resources; (3) IRS estimated that in 1989 it lost about $78 million in potential revenues due to taxpayers failing to report forgiven FDIC debt; (4) in 1991, the combined FDIC- and RTC-forgiven debt totalled $10.9 billion; (5) IRS computer matching of 1986 information returns with other federal agencies' forgiven debt information yielded $37 in revenue for every $1 in costs and 83 percent of taxpayers subsequently paid the recommended taxes; (6) taxpayers who did not voluntarily report 1989 unforgiven debts had above average median incomes and had sufficient funds to pay the taxes; (7) FDIC and RTC believe that the benefits of taxpayer's filing information returns on forgiven debt outweighed the costs; (8) forgiven debt information reporting could increase recovery of unpaid social security taxes, assist IRS in locating individuals who had not filed tax returns, and assist taxpayers in meeting exceptions for not reporting forgiven debts; and (9) requiring lenders to file forgiven debt returns could increase IRS ability to collect additional revenue.

Matters for Congressional Consideration

  1. Status: Closed - Implemented

    Comments: The Budget Reconciliation Act enacted this revision. The effective date is January 1995.

    Matter: To improve taxpayer compliance in reporting forgiven debt, Congress should require FDIC and RTC to issue information returns on forgiven debts that exceed $600 and to include the date of the compromised or charged-off debt on the return.

  2. Status: Closed - Implemented

    Comments: The Budget Reconciliation Act enacted this provision. The effective date is January 1995.

    Matter: If FDIC and RTC information reporting on forgiven debts proves to be cost-effective, Congress may wish to explore whether extending similar information reporting to other institutions is warranted.

Recommendation for Executive Action

  1. Status: Closed - Implemented

    Comments: IRS issued regulations to implement the reporting requirements and has finished developing its matching criteria program.

    Recommendation: If Congress enacts related legislation, the Commissioner of Internal Revenue should require IRS to use the information returns on forgiven debts in its enforcement programs.

    Agency Affected: Department of the Treasury: Internal Revenue Service


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