1099-C Reporting: Debt Cancellation
The Omnibus Budget Reconciliation Act includes a section requiring certain financial institutions, including credit unions, to report discharges of indebtedness of $600 or more during any calendar year to the IRS on Form 1099-C, entitled “Cancellation of Debt”.
The IRS has published regulations implementing the law requiring credit unions and other financial institutions to report annually on “discharges of indebtedness.” The regulation (Section 1.6050P-IT) applies to discharges of indebtedness.
A copy of the 1099-C form will need to be sent to the debtor by January 31st of the year following the calendar year in which the indebtedness was discharged, with the 1099-C due to the IRS by February 28th, being the same reporting cycle as with other 1099 forms.
The regulations provide that, generally:
. . . indebtedness will be considered discharged upon the occurrence of an identifiable event indicating that the indebtedness will never have to be paid by the debtor, taking into account all the facts and circumstances.
According to the regulations, identifiable events include, but are not limited to:
(1) a discharge of indebtedness by a bankruptcy court;
(2) an agreement between the credit union and the debtor to discharge all or part of the debt;
(3) a cancellation or extinguishment by operation of law that renders the debt unenforceable (e.g., expiration of the statute of limitations for collection of the debt).
Certain bankruptcies. You are not required to report a debt discharged in bankruptcy unless you know from information included in your books and records that the debt was incurred for business or investment purposes.
If you are required to report a business or investment debt discharged in bankruptcy, report it for the later of:
- The year in which the amount of discharged debt first can be determined or
- The year in which the debt is discharged in bankruptcy.
- There may also be other “facts and circumstances” that trigger the 1099-C reporting.
For example, the credit union’s attempt to collect a loan is another one of the “facts and circumstances” that the credit union must evaluate in determining if it has finally “discharged” the debt, thereby triggering the 1099-C reporting.
Book-keeping entries, such as charging off a loan for regulatory purposes, is not, in and of itself, an identifiable event.
However, the regulations do indicate that such a bookkeeping entry is one of the facts and circumstances that should be taken into account in determining if the debt has been discharged.
Author: Charles R. Harroun, Attorney at Law