# Presentation: 602290

## 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.

**WHAT IS A CANCELLATION/DISCHARGE OF INDEBTEDNESS?**

## Cancellation/discharge of Indebtedness

**	**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.***

**WHAT IS AN IDENTIFIABLE EVENT?**

## Cancellation/discharge of Indebtedness

- 	_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 creditor’s defined policy; and
- (8) Expiration of the non-payment testing period (generally, non-payment on the debt for 3 years).

**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**.

## 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.

## 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.

## 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.

## 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.