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1 Cancellation/discharge of Indebtedness Under the Internal Revenue Code, a cancellation/discharge of indebtedness may be income to a debtor for tax purposes.

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Presentation on theme: "1 Cancellation/discharge of Indebtedness Under the Internal Revenue Code, a cancellation/discharge of indebtedness may be income to a debtor for tax purposes."— Presentation transcript:

1 1 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 P-1. WHAT IS A CANCELLATION/DISCHARGE OF INDEBTEDNESS?

2 2 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?

3 3 Cancellation/discharge of Indebtedness 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). 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.

4 4 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.

5 5 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 28 th of the year following close-out or by March 31 st if filed electronically. A copy of the 1099-C must be sent to the debtor by January 31 st 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.

6 6 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.

7 7 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.


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