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IRS Form 1099-C: Compliance for Indebtedness Discharge

Mon, Jun 19, 2017

Occasionally, credit union members may become past due on their obligations to the credit union, and the credit union pursues the collection of these debts in accordance with applicable laws and regulations. However, when an identifiable event occurs (meaning one of the eight possible scenarios listed below) indebtedness is considered discharged, which means the debt never has to be repaid by the debtor.

The Internal Revenue Code defines the receipt of funds that are not required to be repaid (i.e., discharged) as taxable income to the debtor. Credit unions report this type of debt using Internal Revenue Service (IRS) Form 1099-C. By requiring a credit union to report the discharged debt to the IRS using Form 1099-C and provide a copy of Form 1099-C to the affected debtor, a debtor may be more inclined to comply with the tax law and report his/her discharged debt as income.

Reporting is only required for discharges of indebtedness of $600 or more.

The Mortgage Debt Relief Act (Pub. Law 110-142) provides that discharges of mortgages of up to $2 million dollar secured on their principal residences will not be subject to taxation. The law applies to discharges entered into between 2007-2009. However credit unions must still file the 1099-C.

Indebtedness is considered discharged (requiring the credit union to file Form 1099-C) only when one of the following seven identifiable events occurs:

  • A debt is discharged in bankruptcy, but only if the credit union knows from its books and records that the debt was for business or investment purposes;
  • A discharge of indebtedness pursuant to an agreement between the credit union and the member;
  • A discharge of indebtedness as a result of a credit union decision to discontinue its collection activity against that debt;
  • A debt that is canceled or extinguished due to the expiration of the statute of limitations;
  • A debt that is canceled or extinguished in receivership or foreclosure in a state or federal court;
  • A debt that is canceled or extinguished pursuant to the credit union's election of foreclosure remedies; or
  • A debt that is canceled or extinguished, rendering it unenforceable, pursuant to a probate or similar proceeding.

As of November 10, 2016, the 36-month non-payment testing period was eliminated from the above list. The IRS believed the 36-month non-payment rule created confusion for both the debtor and creditor and did not increase tax compliance or provide the IRS with valuable third-party information. This means that non-payment of a debt for a 36-month period will no longer be an “identifiable event” for Forms 1099-C that are filed after December 31, 2016.

Credit unions should monitor their members' outstanding debts in case one of the seven identifiable events listed above occurs. If one of the listed events does occur and the indebtedness totals $600 or more, the credit union will have to file Form 1099-C.