A faulty election to exclude debt discharge income can be corrected… But you have to throw yourself on the IRS’ mercy, as this taxpayer did. A lender foreclosed on a rental property and issued a 1099-C form to the owner to report the waived debt.
The taxpayer was insolvent at the time, and the amount of his insolvency exceeded the amount of debt that was canceled in the foreclosure. His CPA prepared Form 982 to exclude the income under the insolvency exception but failed to complete the rest of the form to elect to reduce the basis of other assets or net operating losses. Despite the oversight, the Revenue Service privately ruled that he could have more time to file an amended return and attach a proper Form 982.