IRS Removes 36 Month Nonpayment Of Debt Information Reporting Rule

Posted on Thursday, December 22, 2016

The IRS recently issued final regulations that remove the rule under Code Sec. 6050P that creditors were to file an IRS Form 1099-C, Cancellation of Indebtedness following a 36-month period of nonpayment of debt. The provision requiring reporting following the expiration of the 36-month nonpayment testing period was one that tax practitioners criticized as confusing for taxpayers.

Under Code Sec. 61(a)(12), cancellation of indebtedness (COD) income is to be included in gross income, unless some exception applies. Such exceptions, found under Code Sec. 108, includes bankruptcy, insolvency or other such circumstances.

Additionally, Code Sec. 6050P and accompanying regulations, requires the reporting of COD income to encourage taxpayer compliance with COD income inclusion, as well as IRS enforcement of the COD income inclusion rules. Under Code Sec. 6050P, COD income of $600 or more is to be reported on Form 1099-C when any one of eight identifiable events occur. Although seven of the identifiable events that trigger the reporting obligation result in the actual discharge of debt, the eighth, pertaining to the expiration of the 36-month nonpayment testing period, did not necessarily result from an actual discharge of debt. It was this provision that could create confusion for taxpayers, the IRS admitted when it issued proposed regulations in October 2014 eliminating the use of the 36-month nonpayment testing period as an identifiable event that triggered reporting.

The Treasury Department and IRS also expressed such concerns with respect to taxpayer confusion, and also stated that a 36-month nonpayment testing period reporting rule does not increase tax compliance by debtors or provide the IRS with valuable third-party information that may be used to ensure taxpayer compliance. Accordingly, the IRS issued proposed, and now final regulations, which reflect much of the proposed regulations, removing the 36-month nonpayment testing period as an identifiable event warranting Form 1099-C reporting.

The final regulations apply to information returns required to be filed, and payee statements required to be furnished, after December 31, 2016. Because the deadline for filing information returns and furnishing payee statements for calendar year 2016 would be after December 31, 2016, the expiration of the 36-month testing period during 2016 does not create a requirement to file information returns and furnish payee statements.

Posted in Tax And Accounting Topics For Business

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