IRS Eliminates 36-Month Nonpayment Test for Canceled Debt Reporting
Dec. 1, 2016
In final regulations (TD 9793) issued Nov. 9, 2016, the IRS announced that a 36-month period without any payments on a delinquent debt no longer will require financial institutions or federal agencies to issue a Form 1099-C, “Cancellation of Debt.” The final rules apply to information returns that have to be filed in 2017.
The previous rules that were released in 2009 required financial institutions or federal agencies to file Form 1099-C if a borrower had gone 36 months without making any payment on a debt if the debt had not otherwise been discharged or satisfied. In the recently released final regulations, the IRS stated that the 36-month requirement doesn’t necessarily reflect a true cancellation of debt but instead creates confusion for taxpayers and the IRS. Because the regulations apply to information returns that are required to be filed in 2017, lenders will need to review their systems to eliminate any loans that previously had been identified to receive a 1099-C as a result of not receiving payments during a 36-month period ending in 2016.
Under the modified regulations, Form 1099-C should be issued upon any of these situations:
- A discharge of indebtedness under the bankruptcy code
- A cancellation or extinguishment of an indebtedness that renders the debt unenforceable in a receivership, foreclosure, or similar proceeding in a federal or state court, as described in Section 368(a)(3)(A)(ii) (other than a discharge under the Bankruptcy Code)
- A cancellation or extinguishment of an indebtedness upon the expiration of the statute of limitations for collection (but only if, and only when, the debtor’s statute of limitations affirmative defense has been upheld in a final judgment or decision in a judicial proceeding, and the period for appealing the judgment has expired) or upon the expiration of a statutory period for filing a claim or commencing a deficiency judgment proceeding
- A cancellation or extinguishment of an indebtedness pursuant to an election of foreclosure remedies by a creditor that statutorily extinguishes or bars the creditor’s right to pursue collection of the indebtedness
- A cancellation or extinguishment of an indebtedness that renders a debt unenforceable pursuant to a probate or similar proceeding
- A discharge of indebtedness pursuant to an agreement between an applicable entity and a debtor to discharge indebtedness at less than full consideration
- A discharge of indebtedness pursuant to a decision by the creditor, or the application of a defined policy of the creditor, to discontinue collection activity and discharge debt
The final rules reflect the IRS’ and the U.S. Department of Treasury’s stance that information reporting obligations should arise only when there is an actual discharge of debt. If there is no actual discharge of debt, the 36-month requirement and subsequent filing of Form 1099-C can have the effect of requiring the debtor to pick up taxable income while the creditor continues its collection efforts. In addition, issuing Form 1099-C prior to the actual discharge of the debt might cause the IRS to initiate compliance actions too early.