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Cancellation/discharge of Indebtedness. Under the Internal Revenue Code, a cancellation/discharge of indebtedness may be income to a debtor for tax purposes. See 26 U.S.C. 61(a)(12).
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Cancellation/discharge of Indebtedness • Under the Internal Revenue Code, a cancellation/discharge of indebtedness may be income to a debtor for tax purposes. See 26 U.S.C. 61(a)(12). • Federal agencies are required to report certain cancelled/discharged debts to the IRS (26 U.S.C. 6050P). IRS Form 1099-C is used to report this information. • IRS has issued an official publication “Instructions to Forms 1099-A and 1099-C” and detailed regulations at 26 CFR 1.6050P-1. WHAT IS A CANCELLATION/DISCHARGE OF INDEBTEDNESS?
Cancellation/discharge of Indebtedness IRS regulations list 8 circumstances which trigger the requirement to report a discharge of indebtedness to IRS on Form 1099-C. These are called identifiable events. WHAT IS AN IDENTIFIABLE EVENT?
Cancellation/discharge of Indebtedness WHAT ARE THE 8 IDENTIFIABLE EVENTS? The rules regarding identifiable events are very detailed and IRS regulations should be reviewed carefully to understand each event, its limitations and its exceptions. Very generally, the 8 identifiable events concern discharges of indebtedness involving: • (1) Title 11 Bankruptcy (Business reorganization); • (2) receivership, foreclosure or similar court proceedings; • (3) upholding of the affirmative defense of the statute of limitations; • (4) use of foreclosure remedies (such as non-judicial foreclosure) where further collection is barred; • (5) probates or similar proceedings where the debt becomes unenforceable; • (6) compromises for less than the full amount of the debt; • (7) decision by the creditor to cease collection on the debt based on the creditor’s defined policy; and • (8) Expiration of the non-payment testing period (generally, non-payment on the debt for 3 years).
Cancellation/discharge of Indebtedness WHAT ARE SOME OF THE RULES REGARDING IRS FORM 1099-C REPORTING? • An agency is required to file a 1099-C following an “identifiable event”. • There is a dollar amount threshold. The filing of a 1099-C is mandatory for debts over $600, but an agency may report lesser amounts. • For lending transactions the dollar amount refers only to principal. • For non-lending transactions the dollar amount includes administrative costs and penalties. • Interest may be reported in lending and non-lending transactions, at the discretion of the creditor agency. • The agency should not report a debt if it has a lien against the debtor’s property, unless the agency decides to release the lien.
Cancellation/discharge of Indebtedness WHEN MUST THE 1099-C BE FILED WITH THE IRS AND PROVIDED TO THE DEBTOR? • The agency must send a 1099-C to the IRS by February 28th of the year following close-out or by March 31st if filed electronically. • A copy of the 1099-C must be sent to the debtor by January 31st of the year following close-out. • For debts referred to FMS for cross-servicing, FMS will complete 1099-C reporting, if requested by the agency.
Cancellation/discharge of Indebtedness HOW DOES REPORTING A DISCHARGE OF INDEBTEDNESS TO IRS AFFECT THE AGENCY’S ABILITY TO COLLECT ON THE DEBT? Once a debt is reported to the IRS, no further collection action may be taken by the agency. • The agency may accept voluntary payments on the debt, and there is no obligation to notify IRS of a change in the amount of the debt.
Cancellation/discharge of Indebtedness STUDENTS – YOU HAVE DONE WELL! YOU HAVE COMPLETED ALL THE PARTS OF MY TUTORIAL! YOUR PROFESSOR IS PROUD OF YOU! Congratulations, your are now “TERMINATORS, WRITER-OFFERS, AND DISCHARGERS OF DEBT.” As a review of your knowledge, I have prepared several questions for you to answer. If you are up to the challenge, proceed to the next part by clicking on the arrow.
