IRS estimates suggest that for about 61,000 to 93,000  of the returns with a Form 982, forgiven debt for a qualified principal  residence was the only type of forgiven debt, and taxpayers excluded  about $6.4 billion to $11.8 billion from taxable income. Additionally,  because taxpayers excluding multiple types of debt from income are only  required to report the total amount being excluded and not the amount for  each individual type, IRS lacks data to determine the dollar amount of  forgiven mortgage debt excluded for these taxpayers. IRS faces several compliance challenges in administering this complicated  tax provision. IRS officials reported that it may be difficult to collect  additional taxes on forgiven debts, particularly when taxpayers are already  insolvent and defaulting on debts, and that this and other considerations,  such as IRS’s return on investment, would affect IRS’s decisions about  allocating resources for enforcing this provision. However, as noted  above, there is evidence some taxpayers have the ability to pay additional  tax if owed, and certain housing market data show that the potential for  significant noncompliance with the exclusion of forgiven mortgage debt  exists. Current IRS  forms provide limited information on mortgage debt forgiveness and IRS is  not making full use of all available data. For example,    Form 982 does not contain enough information to allow IRS to check  for compliance because the form cannot be easily matched against  information received from lenders on Form 1099-C. Form 982, Part 1  uses check boxes instead of dollars to report the amount of forgiven  debt being excluded. As a result, IRS cannot determine what dollar  amounts are being excluded for each type of qualified cancelled debt. Form 1099-C instructions ask lenders to provide an open-ended  description of the type of cancelled debt, but do not require the lender  to uniformly identify the specific type of cancelled debt. For example,  the form does not use a series of check boxes or apply codes so that  lenders could select among a list of common cancelled debt types (e.g.,  mortgage, home equity line of credit, credit card, auto loan, etc.). According to IRS officials, collecting such information might not result  in a perfect match in all cases across the two forms. Further, we previously recommended, that IRS  consider collecting the address of the secured property on Form 1098,  “Mortgage Interest Statement,” for taxpayers deducting mortgage  interest to help determine the home’s use and eligibility for the  deduction and improve compliance for taxpayers reporting rental real  estate activity. IRS agreed to study the issue. Without being able to systematically identify whether the forgiven debt  is for a mortgage, IRS also cannot identify taxpayers who may be  eligible for the provision, but are not taking advantage of it. IRS is not using available internal or third-party data to determine  whether taxpayers with forgiven mortgage debt own multiple homes— also a potential indicator that the forgiven debt is not for a principal  residence. To enhance IRS’s ability to detect noncompliance with mortgage debt  forgiveness provisions,  (1) 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;  (2) 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;  (3) 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;  (4) 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; and  (5) use the additional data reported on the revised Form 982 and Form  1099-C to assess the extent to which taxpayers are compliant. What challenges, if any, does IRS face in administering the exclusion of

forgiven mortgage debt from taxable income and how effectively is IRS  addressing the challenges? 3. What challenges, if any, could taxpayers face in understanding whether  forgiven mortgage debt can be excluded from taxable income and what  steps can be taken to address these challenges? Background

			The Mortgage Forgiveness Debt Relief Act of 2007 (P.L. The Emergency Economic Stabilization Act of 2008 (P.L. The mortgage debt must have been used to buy, build, or substantially improve a  principal residence and must be secured by the property. 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 2013.2  This suggests that not all taxpayers with forgiven mortgage debt are bankrupt  or insolvent and may have the ability to pay taxes on forgiven debts. Objective 1: IRS Estimates Suggest the Dollar Amount of Forgiven Mortgage Debt Excluded from Income Could be Significant

Based on a sample of 2008 tax returns, IRS Statistics of Income (SOI)  officials estimate that for tax year (TY) 2008, about 126,000 to 169,000  returns included a Form 982, excluding a total of about $15.2 billion to  $24.6 billion of forgiven debt from taxable income. Over the last 5 years, vacation  home and investment property purchases are estimated to have ranged from 40  percent (2005) to 27 percent (2009) of home sales. 3.
Why GAO Did This Study

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.

What GAO Found

IRS estimates suggest the dollar amount of forgiven mortgage debt excluded from income could be significant. IRS Statistics of Income (SOI) officials estimate that for tax year 2008, the most current tax year for which data are available, about 126,000 to 169,000 returns included a Form 982, excluding a total of about $15.2 billion to $24.6 billion of forgiven debt from taxable income. IRS estimates suggest that for about 61,000 to 93,000 of the returns with a Form 982, forgiven debt for a qualified principal residence was the only type of forgiven debt, and taxpayers excluded about $6.4 billion to $11.8 billion from taxable income. Additionally, because taxpayers excluding multiple types of debt from income are only required to report the total amount being excluded and not the amount for each individual type, IRS lacks data to determine the dollar amount of forgiven mortgage debt excluded for these taxpayers. IRS faces several compliance challenges in administering this complicated tax provision. IRS officials reported that it may be difficult to collect additional taxes on forgiven debts, particularly when taxpayers are already insolvent and defaulting on debts, and that this and other considerations, such as IRS's return on investment, would affect IRS's decisions about allocating resources for enforcing this provision. However, there is evidence some taxpayers have the ability to pay additional tax if owed, and certain housing market data show that the potential for significant noncompliance with the exclusion of forgiven mortgage debt exists. Over the last 5 years, vacation home and investment property purchases are estimated to have ranged from 40 percent (2005) to 27 percent (2009) of home sales. Current IRS forms provide limited information on mortgage debt forgiveness and IRS is not making full use of all available data. For example, 1) Form 982 does not contain enough information to allow IRS to check for compliance because the form cannot be easily matched against information received from lenders on Form 1099-C. Form 982, Part 1 uses check boxes instead of dollars to report the amount of forgiven debt being excluded. As a result, IRS cannot determine what dollar amounts are being excluded for each type of qualified cancelled debt. 2) Form 1099-C instructions ask lenders to provide an open-ended description of the type of cancelled debt, but do not require the lender to uniformly identify the specific type of cancelled debt. For example, the form does not use a series of check boxes or apply codes so that lenders could select among a list of common cancelled debt types (e.g., mortgage, home equity line of credit, credit card, auto loan, etc.). 3) Neither Form 982 nor Form 1099-C requires the taxpayer or lender to disclose the address of the property secured by the forgiven debt. According to IRS officials, collecting such information might not result in a perfect match in all cases across the two forms. However, it would allow IRS to better determine whether the forgiven debt is for a principal residence. Further, we previously recommended, that IRS consider collecting the address of the secured property on Form 1098, "Mortgage Interest Statement," for taxpayers deducting mortgage interest to help determine the home's use and eligibility for the deduction and improve compliance for taxpayers reporting rental real estate activity. IRS agreed to study the issue. 4) Without being able to systematically identify whether the forgiven debt is for a mortgage, IRS also cannot identify taxpayers who may be eligible for the provision, but are not taking advantage of it. 5) IRS is not using available internal or third-party data to determine whether taxpayers with forgiven mortgage debt own multiple homes--also a potential indicator that the forgiven debt is not for a principal residence.