TaxMama note: The Franchise Tax Board is starting these audits of people who have been relieved of debt in one manner or another.
Odds are, at least 30% – 40% of the audits will turn up errors, with taxes due.
I bet that 10% – 15% will turn up errors in the taxpayers favor, where they could have taken advantage of certain loopholes, but didn’t know they were available to them.
Once California’s FTB is done, the audit errors will be turned over to IRS for additional assessments. So, if you got 1099-Cs, go back and look at your tax returns.
FTB auditing COD income (2-1-11)
In January 2011, the FTB began mailing letters to pre-selected individuals who received a Form 1099-C, Cancellation of Debt (COD), for tax years 2007 and 2008.
According to the February 1, 2011, FTB Tax News, letters are scheduled to be mailed to taxpayers who had debt relief on properties such as a second home, rental, investment, or business property, which do not qualify for the principal residence exclusion.
These so-called “review” letters focus on COD income related to these “nonqualified properties” and advise taxpayers that they may still be able to exclude COD income under other provisions. Failure to promptly respond to the review letter could result in formal audit action, penalties, and/or a tax assessment.
For more information on this audit program, attend Spidell’s upcoming 2011 Filing Season Update webinar. This webinar is free for Spidell’s California Taxletter® subscribers. Click here for more information and to register. Taxletter subscribers should call (714) 776-7850 to register.