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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.

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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.

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Cancellation/discharge of
Indebtedness
WHAT ARE THE 8 IDENTIFIABLE
EVENTS?
The rules regarding identifiable events are very
detailed and IRS regulations should be reviewed
Very generally,
carefullytheto
8 identifiable
understand events
each concern discharges
event, its of
limitations
indebtedness
and involving:
its exceptions.
 (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 creditor’s defined policy; and
 (8) Expiration of the non-payment testing period (generally, non- 3
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
debtor’s property, unless the agency decides to release the
lien.
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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.

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Cancellation/discharge of
Indebtedness
HOW DOES REPORTING A DISCHARGE OF
INDEBTEDNESS TO IRS AFFECT THE
AGENCY’S 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.

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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.