Failure to Make Debt Payments for 36-Months No Longer Triggers Deemed Discharge

(Parker Tax Publishing November 2016)

The IRS has issued final regulations that remove a rule that a deemed discharge of indebtedness - for which a Form 1099-C, Cancellation of Debt, must be filed - occurs at the expiration of a 36-month non-payment period. The IRS noted that reporting under this rule could mislead taxpayers into believing their debt had been discharged and that they had incurred cancellation of debt income, even though the creditor was still seeking to collect the debt. T.D. 9793 (11/10/16).

Code Sec. 6050P generally requires applicable financial entities (such as financial institutions, credit unions, and federal executive agencies) that discharge indebtedness of $600 or more during a calendar year to file information returns with the IRS and to furnish information statements to the taxpayers whose debt was discharged. Final regulations issued in 1996 provided that a person's debt is deemed to be discharged for information reporting purposes only on the occurrence of an identifiable event specified under Reg. Sec. 1.6050P-1(b)(2), regardless of whether an actual discharge has occurred on or before the date of the identifiable event.

Under Reg. Sec. 1.6050P-1(b)(2)(iv), one such identifiable event is presumed to have occurred if a creditor does not receive a payment for 36 months. The creditor can generally rebut the presumption if the creditor engages in significant bona fide collection activity within a 12-month period ending at the close of the calendar year, or if the facts and circumstances indicate that the debt has not been discharged. A creditor's decision not to rebut the presumption is not an indication that it has discharged the debt, but the creditor is still required to report amounts on a Form 1099-C, Cancellation of Debt, to the debtor taxpayer.

According to the IRS, because reporting under the 36-month rule may not reflect an actual discharge of indebtedness, taxpayers receiving Forms 1099-C may conclude that the debts have, in fact, been discharged, causing the taxpayers to erroneously include in income the amounts reported on Forms 1099-C even though creditors may continue to attempt to collect the debt. The IRS noted that issuing a Form 1099-C before a debt has been discharged may also cause the IRS to initiate compliance actions even though a discharge has not occurred.

Stating that information reporting under Code Sec. 6050P should generally coincide with the actual discharge of a debt, the IRS has issued final regulations that remove the 36-month rule from the list of identifiable events.

The final regulations are applicable to information returns required to be filed, and payee statements required to be furnished, after December 31, 2016.

For a discussion of information reporting requirements relating to the cancellation of debt, see Parker Tax ¶252,530.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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