Cancellationdischarge of Indebtedness

1
Cancellation/discharge of Indebtedness
WHAT IS A 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.

2
Cancellation/discharge of Indebtedness
WHAT IS AN IDENTIFIABLE EVENT?

• 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.

3
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 creditors defined
  policy and
• (8) Expiration of the non-payment testing period
  (generally, non-payment on the debt for 3 years).

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 debtors property, unless the
  agency decides to release the lien.

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 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.

6
Cancellation/discharge of Indebtedness

• HOW DOES REPORTING A DISCHARGE OF INDEBTEDNESS
  TO IRS AFFECT THE AGENCYS 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
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.