Tax Administration: Expanded Information Reporting Could Help IRS Address Compliance Challenges with Forgiven Mortgage Debt

Highlights

To assist the growing number of taxpayers facing foreclosure or mortgage restructuring, the Mortgage Forgiveness Debt Relief Act of 2007, and its 3-year extension as part of the Emergency Economic Stabilization Act of 2008, allows taxpayers to generally exclude from taxable income forgiven mortgage debt used to buy, build, or substantially improve a principal residence. Joint Committee on Taxation (JCT) estimates originally suggested that the exclusion of forgiven mortgage debt from taxable income may result in about $968 million in federal revenue losses from fiscal year (FY) 2008 through FY 2013 and more recent estimates suggest that the revenue losses could be closer to $1.9 billion. The Department of Treasury estimates suggest that the exclusion may result in federal revenue losses of about $1.4 billion from FY 2008 through FY 2013. Some taxpayers with forgiven mortgage debts may be bankrupt or insolvent; however, others are not and therefore may have the ability to pay taxes on forgiven mortgage debts. The briefing slides summarize our assessment of the Internal Revenue Service's (IRS) administration of this tax provision. In response to your request, our objectives were to identify 1. the number of taxpayers who have reported the exclusion of forgiven mortgage debt since the program's inception and the dollar amount excluded; 2. the challenges, if any, IRS faces in administering the exclusion and evaluate how effectively IRS is addressing the challenges; and 3. the challenges, if any, taxpayers could face in understanding whether forgiven mortgage debt can be excluded from taxable income and evaluate how to address these challenges.

Recommendations

Recommendations for Executive Action

Agency Affected	Recommendation	Status
Internal Revenue Service	To enhance IRS's ability to detect noncompliance with mortgage debt forgiveness provisions, the Commissioner of Internal Revenue should modify Form 982, Part 1 to segregate the total dollar amount of forgiven debt by exclusion type and capture the information in IRS's databases.	Closed – Implemented Legislative and executive actions have been taken consistent with GAO's August 2010 recommendation. In July 2015, Congress passed and the President signed into law the Surface Transportation and Veterans Health Care Choice Improvement Act (Public Law 114-41). Section 2003 of the act requires taxpayers receiving mortgage interest payments to report the origination date of the mortgage, the amount of outstanding principal at the beginning of the calendar year, and the property's address. This reporting requirement applies to returns filed starting in 2017. In response to the legislation, IRS updated Form 1098 Mortgage Interest Statement for the 2017 filing season. As of December 2019, IRS had not revised two other forms to the extent GAO recommended -- the Forms 982 and 1099-C -- to collect specific information from taxpayers and lenders concerning the amount of forgiven debt attributable to a principal residence and the address of that residence. However, because IRS is now collecting similar information via the updated Form 1098, IRS is in a better position to ensure compliance with the forgiven mortgage debt exclusion without incurring additional costs to modify the two other forms. Further, consistent with GAO's 2010 recommendation, IRS has made some changes to Form 1099-C so that more data could be collected from lenders and made greater use of internal and third-party data to identify whether mortgage debts being excluded are for a principal residence.
Internal Revenue Service	To enhance IRS's ability to detect noncompliance with mortgage debt forgiveness provisions, the Commissioner of Internal Revenue should modify Form 1099-C to require lenders to identify in a more useable format (check boxes or coding, for example) the specific type of cancelled debt and capture the information in IRS's databases.	Closed – Implemented IRS agreed with this recommendation. In December 2011, IRS published a new version of the Form 1099-C for use in 2012. The new version of the form differs in three places from the version at the time of our report. Most significantly, the title of Box 6 has been modified to so that lenders can provide more information to IRS about the type of event that resulted in the cancellation of debt. In addition, IRS published a new version of the instructions for Form 1099-C that specify that lenders enter one of nine codes for the identifiable event in Box 6.
Internal Revenue Service	To enhance IRS's ability to detect noncompliance with mortgage debt forgiveness provisions, the Commissioner of Internal Revenue should modify the Form 982 and Form 1099-C so that filers disclose the address of the secured property for which the debt is being forgiven and capture the information in IRS's databases.	Closed – Implemented Legislative and executive actions have been taken consistent with GAO's August 2010 recommendation. In July 2015, Congress passed and the President signed into law the Surface Transportation and Veterans Health Care Choice Improvement Act (Public Law 114-41). Section 2003 of the act requires taxpayers receiving mortgage interest payments to report the origination date of the mortgage, the amount of outstanding principal at the beginning of the calendar year, and the property's address. This reporting requirement applies to returns filed starting in 2017. In response to the legislation, IRS updated Form 1098 Mortgage Interest Statement for the 2017 filing season. As of December 2019, IRS had not revised two other forms to the extent GAO recommended -- the Forms 982 and 1099-C -- to collect specific information from taxpayers and lenders concerning the amount of forgiven debt attributable to a principal residence and the address of that residence. However, because IRS is now collecting similar information via the updated Form 1098, IRS is in a better position to ensure compliance with the forgiven mortgage debt exclusion without incurring additional costs to modify the two other forms. Further, consistent with GAO's 2010 recommendation, IRS has made some changes to Form 1099-C so that more data could be collected from lenders and made greater use of internal and third-party data to identify whether mortgage debts being excluded are for a principal residence.
Internal Revenue Service	To enhance IRS's ability to detect noncompliance with mortgage debt forgiveness provisions, the Commissioner of Internal Revenue should determine if available data (including IRS and third-party data) would allow IRS to better identify whether the debt being excluded is for a principal residence.	Closed – Implemented IRS agreed with this recommendation and examined available IRS and third-party data. According to IRS, these data are useful in determining whether the debt being excluded is for a principal residence and IRS is currently using these data in the examination process.
Internal Revenue Service	To enhance IRS's ability to detect noncompliance with mortgage debt forgiveness provisions, the Commissioner of Internal Revenue should use the additional data reported on the revised Form 982 and Form 1099-C to assess the extent to which taxpayers are compliant.	Closed – Implemented Legislative and executive actions have been taken consistent with GAO's August 2010 recommendation. In July 2015, Congress passed and the President signed into law the Surface Transportation and Veterans Health Care Choice Improvement Act (Public Law 114-41). Section 2003 of the act requires taxpayers receiving mortgage interest payments to report the origination date of the mortgage, the amount of outstanding principal at the beginning of the calendar year, and the property's address. This reporting requirement applies to returns filed starting in 2017. In response to the legislation, IRS updated Form 1098 Mortgage Interest Statement for the 2017 filing season. As of December 2019, IRS had not revised two other forms to the extent GAO recommended -- the Forms 982 and 1099-C -- to collect specific information from taxpayers and lenders concerning the amount of forgiven debt attributable to a principal residence and the address of that residence. However, because IRS is now collecting similar information via the updated Form 1098, IRS is in a better position to ensure compliance with the forgiven mortgage debt exclusion without incurring additional costs to modify the two other forms. Further, consistent with GAO's 2010 recommendation, IRS has made some changes to Form 1099-C so that more data could be collected from lenders and made greater use of internal and third-party data to identify whether mortgage debts being excluded are for a principal residence.
Internal Revenue Service	To provide better information for paid preparers and taxpayers to determine eligibility for excluding forgiven mortgage debt from taxable income, the Commissioner of Internal Revenue should explore and implement readily available low-cost options to help clarify the tax treatment of forgiven debt, including options such as making IRS's interactive tool for cancelled debt publicly available for the 2011 filing season.	Closed – Implemented In February 2011 (in time for the 2011 tax filing season), IRS made its interactive tool for canceled debt publicly available. The tool asks taxpayers the same series of questions that would be asked if the taxpayer called the tax law toll-free line.
Internal Revenue Service	To provide better information for paid preparers and taxpayers to determine eligibility for excluding forgiven mortgage debt from taxable income, the Commissioner of Internal Revenue should explore and implement readily available low-cost options to help clarify the tax treatment of forgiven debt, including options such as using IRS's telephone software to obtain better information about why, if at all, taxpayers call IRS with questions about forgiven mortgage debt.	Closed – Implemented IRS agreed with this recommendation and, in 2011, used Contact Analytics to help determine the extent to which taxpayers called IRS about cancellation of debt issues and the reasons they called.
Internal Revenue Service	To provide better information for paid preparers and taxpayers to determine eligibility for excluding forgiven mortgage debt from taxable income, the Commissioner of Internal Revenue should explore and implement readily available low-cost options to help clarify the tax treatment of forgiven debt, including options such as working with software companies to more fully support complex debt cancellation issues, particularly those related to forgiven mortgage debts.	Closed – Implemented IRS agreed with this recommendation and, for the 2011 filing season, communicated with tax software companies about the need to more fully support complex debt cancellation issues.
Internal Revenue Service	To provide better information for paid preparers and taxpayers to determine eligibility for excluding forgiven mortgage debt from taxable income, the Commissioner of Internal Revenue should explore and implement readily available low-cost options to help clarify the tax treatment of forgiven debt, including options such as either sending notices to taxpayers when a lender files a Form 1099-C indicating a forgiven mortgage and the taxpayer does not file a Form 982 or documenting that the costs of doing so would exceed the benefits.	Closed – Not Implemented IRS disagreed with this recommendation because its analysis did not support making the requisite change to Form 1099-C, nor to the return processing system. Still, IRS has continued current education and outreach activities to affected taxpayers. For example, IRS has continued to revise publications that are intended to help taxpayers and paid preparers understand the tax treatment of cancelled debts, foreclosures, repossessions and abandonments.

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