Back in July I received a letter in the mail that nobody likes to receive...An audit letter from the IRS. They had looked at our 2007 tax return and found some differences than what was reported to them, so they asked us to clarify them. Here is the details:
1. There was a large amount on a 1099-C from forgiven debt that they did not see within the income portions of 1040.
2. There was $1 of interest received on a bank account that we had not received a statement on. The $1 of interest did not affect our amount of tax owed.
Because we were insolvent at the time, we had filled out the proper form electronically to inform the IRS that the forgiven debt should not be considered as income due to our insolvent situation. It appears though that the information did not transmit to them properly. What we did to fix the problem was we provided a copy of the form that was submitted electronically, provided a net worth statement based upon the date the amount was forgiven, a letter explaining the situation, and a form they included with the audit letter filled out. We were able to provide the net worth statement due to my thorough tracking through NetWorthIQ.com.
A couple weeks after we had mailed in the information we received a letter informing us they had received our information and were reviewing it. Last week in the mail a letter stated that they had reviewed the information and that they corrected their information and we owed nothing. We're saving that letter with our 2007 taxes as a precaution. In addition, our 2009 taxes will be mailed in on paper so that we can make sure the information is transmitted correctly to them for the forgiven debt.