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 Overview 

An agency has the affirmative responsibility to try to collect 

delinquent debts that are owed to the agency, or referred to the 

agency for collection. However, at some point in the collection 

process it may become evident that a debt is “uncollectible,” and it 

may be appropriate to terminate collection action, and/or writeoff the debt. 

An agency fulfills its affirmative responsibility to try to collect 

delinquent debts by engaging in “active collection.” “Active 

collection” means that the debt is being collected through the use 

of all appropriate debt collection remedies, including, but not 

limited to, demand letters, credit bureau reporting, offset, 

garnishment, foreclosure, litigation, and referral to the Department 

of the Treasury’s (Treasury) Bureau of Fiscal Service (Fiscal 

Service) for collection (known as cross-servicing). See Chapter 6, 

Delinquent Debt Collection. 

Termination of collection action occurs when “it appears [to an 

agency] that no person liable on the claim has the present or 

prospective ability to pay a significant amount of the claim or the 

cost of collecting the claim is likely to be more than the amount 

recovered.” See 31 U.S.C. § 3711(a)(3). Termination of collection 

action is a decision to cease active collection action on a debt, in 

accordance with criteria set out in the Federal Claims Collection 

Standards, because such action is not economically worthwhile or is 

otherwise inappropriate. Suspension of collection action occurs 

when an agency decides to temporarily cease collection action. 

Once an agency terminates collection action, it may pursue 

passive collection activities to try to collect the debt. “Passive 

collection” means that the debt is no longer being actively 

collected; that is, the debt remains secured by a judgment lien or 

other lien interest, has not been removed from the Treasury Offset 

Program (TOP) or is otherwise being collected by offset, and/or is 

scheduled for future sale. 

Except for agencies with independent statutory authority to 

terminate collection activity on its own debts, Department of Justice 

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(DOJ) concurrence is required before an agency terminates or 

suspends active collection on a debt over $100,000 (principal 

only). DOJ has delegated to Fiscal Service the authority to approve 

termination of collection action on a debt with a principal amount 

of $500,000 or less when the debt is being serviced by Fiscal 

Service in its Cross-Servicing Program. 

Write-off of a debt is an accounting action that results in reporting 

the debt/receivable as having no value on the agency’s financial and 

management reports. The agency does not need DOJ approval to 

write-off a debt since the agency is only adjusting its accounting 

records. Generally, write-off is mandatory for debts delinquent 

more than two years, unless documented and justified to the Office 

of Management and Budget (OMB) in consultation with Treasury. 

However, in those cases where material collections can be 

documented to occur after two years, debt cannot be written off 

until the estimated collections become immaterial. See OMB 

Circular No. A-129, Section V.5. 

Currently Not Collectible (CNC) and close-out are classifications 

for writing-off the debt that indicate whether or not the agency will 

continue debt collection actions after write-off. See OMB Circular 

No. A-129, Section V.5. At the time of write-off, an agency should 

classify the debt as CNC when it intends to continue cost effective 

debt collection action. An agency closes out a debt when it 

determines that further debt collection actions are prohibited (for 

example, a debtor is released from liability in bankruptcy) or the 

agency does not plan to take any future actions (either active or 

passive) to try to collect the debt. 

When a debt is classified as closed-out, an agency must determine 

if the amount due on the debt should be reported to the Internal 

Revenue Service (IRS) as potential income to the debtor under 

Section 6050P of the Internal Revenue Code (26 U.S.C. § 6050P). 

An agency reports such debts to the IRS using IRS Form 1099-C. 

The program decision to terminate collection action and the 

accounting decision to write-off a debt often coincide. For 

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servicing normally should take concurrent actions to terminate 

collection action, write-off the debt and classify it as CNC when: 

 the agency is notified by Fiscal Service that active

collection action is no longer being taken through crossservicing; and

 the debt will remain in TOP.

Similarly, an agency should terminate collection action, write-off 

the debt, and classify it as close-out when the debt is discharged in 

bankruptcy, and there are no other debtors from whom collection 

can be sought. However, agencies should be aware that the 

determinations to terminate collection action and to write-off a 

debt are made for different reasons, and where appropriate and 

consistent with the agency's debt collection strategy for a 

particular class of debts, may be made at different times. 

The following charts provide some basic information concerning 

termination of collection action, write-off, and the classification of 

debts as CNC and close-out. 

Debt Collection Process Action 

Description Authority Timing Comment

TERMINATION/

SUSPENSION

OF

COLLECTION

ACTION

Termination: Agency 

stops all active debt 

collection action; may 

continue passive

collection action. 

Suspension: Agency is 

likely to resume active

collection action at a 

future time. 

31 USC 3711(a)(3);

31 CFR Part 903

Not tied to writeoff, but must occur 

before close-out.

Agency decision to

terminate/suspend

must comply with

Federal Claims

Collection Standards

(31 CFR Part 903).

DOJ concurrence

required for debts 

over $100,000.

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Accounting Action 

Description Authority Timing Comment

WRITE-OFF Agency reports debt as 

having no value on 

financial and 

management reports.

OMB Circular No. 

A-129

Usually no later 

than 2 years after 

debt delinquency; 

not tied to 

termination or 

suspension.

At time of write-off, 

agency must classify 

the debt as CNC or 

close-out.

CURRENTLY NOT 

COLLECTIBLE

(CNC)

A classification after 

write-off when the 

agency has determined 

that debt collection 

efforts should continue.

OMB Circular No. 

A-129

Can only occur at 

the time the debt is 

written-off.

CNC classification 

does not affect 

agencies’ statutory 

and regulatory 

responsibilities to 

pursue debt 

collection.

CLOSE-OUT A classification after 

write-off when the 

agency has determined 

that no further active or

passive debt collection 

action will be taken.

OMB Circular No. 

A-129

Must occur after

write-off and 

termination of 

collection action; 

can occur after CNC 

classification, if 

debt was initially 

classified as CNC at 

time of write-off.

Agency will not take 

any collection action 

after closeout; if 

required by Internal 

Revenue Code and 

regulations, agency 

must report closedout debt to IRS on 

Form 1099-C as 

potential income to

the debtor.

Termination of Collection Action Criteria 

An agency should terminate active collection when one or more of 

the following criteria apply: 

1. The agency is unable to collect any substantial amount

through its own efforts or through the efforts of others.

The following items detail factors an agency should

consider in determining the likelihood of recovering a

substantial amount of a debt:

 the results of previous collection action taken by

the agency. A good indication that the debt is

uncollectible is the return of a debt by a private

collection agency or from Fiscal Service’s CrossServicing Program without collection and with the

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recommendation for write-off, or the inability of 

DOJ to collect on a judgment. 

 the present and future financial condition of the

debtor, taking such factors into account as assets

and liabilities (as verified by a credit bureau

report or a current financial statement),

employment history and potential for future

earnings, and inheritance prospects. See Chapter

6, Delinquent Debt Collection, Installment

Payments, page 6-20. In some circumstances, the

debtor’s future financial prospects may warrant

suspension rather than termination of collection

action. See page 7-10 of this Chapter.

 the debtor’s age and health, including disability

status. If the debtor is deceased, the agency should

file a claim against the debtor’s estate for liquidation

of the debt at the time the estate is settled and all

assets disposed.

 the assets available for liquidation, including the

possibility that assets were fraudulently

transferred or concealed to avoid liquidation.

Agency personnel should consult with agency

counsel regarding fraudulent transfers or

concealments.

 any state law restriction that applies, in the

absence of Federal law, to collections taken

within a state’s borders. Where a debtor is

employed in a state that prohibits wage garnishment,

an agency should consider the use of administrative

wage garnishment under the Debt Collection

Improvement Act of 1996 (DCIA), which authorizes

wage garnishment notwithstanding state law. See

Chapter 6, Delinquent Debt Collection.

2. The agency is unable to locate the debtor. The agency

should attempt to locate the debtor using available sources

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as described in Chapter 6, Delinquent Debt Collection, 

pages 6-71 through 6-73.

3. Costs of collection are anticipated to exceed the amount

recoverable. An agency should not spend more to recover a

debt than what is owed, unless a significant enforcement

principle is at stake. For example, an agency should not

spend $200 to collect a $100 debt. The agency’s collection

strategy should dictate what is reasonable in determining the

costs and benefits of continuing enforced collection efforts.

The items below contain factors the agency should consider

when balancing the costs of collection against probable

recoveries.

 The amount of any fees associated with using a

particular collection tool. For most collection tools,

such as Fiscal Service’s Cross-Servicing Program,

TOP, and private collection agencies, the agency

will not pay a fee unless there are collections. In

many cases, the agency may recover fees by adding

these costs to the debt.

 Agency expenses associated with the time and

resources required to prepare and follow-up on a

debt. Costs may be minimal when most of the

expenses are associated with operating an automated

system for tracking account activity.

 The agency’s “success” rates for the available

debt collection tools. If a given tool has not been

used successfully to collect a particular type of debt,

then it may not be appropriate for the agency to

require the use of that tool prior to termination,

unless use of the tool is mandated by law.

 The probability that the agency will be able to

recover its collection costs.

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 The need to pursue collection when a significant

enforcement principle is at stake.

4. The debt is legally without merit or enforcement of the

debt is barred by applicable statute of limitations. A debt

that is legally without merit is one that was never owed in

the first place and should not have been classified as a debt.

For example, a court determines that the agency’s

interpretation of a statute was incorrect and should not have

resulted in a receivable to the agency. For purposes of

receivables reporting on the Treasury Report on Receivables

Due from the Public, the agency would “reclassify” the

amount.

An agency should not terminate debt collection activity 

based solely on the expiration of the statute of limitations 

for initiation of a lawsuit. An agency should consider the 

availability of other debt collection remedies that may not 

yet be time-barred, such as offset and administrative wage 

garnishment. For information on statute of limitations, see 

Chapter 6, Delinquent Debt Collection, page 6-61.

5. The debt cannot be substantiated. The agency does not or

cannot produce the evidence, witnesses, or supporting

documentation necessary to validate the debt and was not

able to obtain a voluntary repayment of the debt. For

example, the debtor signed a repayment agreement, but the

agency cannot locate it in its files, has no record that the

debtor ever agreed that the debt was owed, and the debtor

refuses to repay or compromise the debt.

6. The debt against the debtor has been discharged in

bankruptcy. The filing of a petition for bankruptcy is a

clear sign that the debtor is either unable or unwilling to

repay his/her debts; this by itself often justifies termination

of collection action. All collection activity outside the

bankruptcy process must cease upon the debtor’s filing of a

bankruptcy petition, except as allowed by law or by the

bankruptcy court. The agency can, concurrently with

terminating active collection, take action to protect its

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interests by filing a proof of claim with the bankruptcy 

court. However, an agency may determine that monies to 

repay the debt are available through the bankruptcy process. 

An agency should consult with its agency counsel to 

determine this. See Chapter 6, Delinquent Debt Collection, 

page 6-57. For example, the agency may be able to pursue 

collection on payments provided under a bankruptcy 

reorganization plan, or may be able to obtain the court’s 

permission to continue a foreclosure action. 

In general, an agency shall terminate collection activity on a 

debt that has been discharged in bankruptcy, regardless of 

the amount, where there are no other debtors or guarantors 

from whom collection may be sought. However, if 

payments to the agency are provided for under a plan of 

reorganization, an agency may continue collection activity 

regarding those payments, subject to the provisions of the 

Bankruptcy Code. Offset and recoupment rights may 

survive discharge of the debtor in bankruptcy and under 

some circumstances, debts also may survive discharge. 

Agency personnel should seek legal advice from the 

agency’s counsel to determine whether the agency’s debts 

have survived a debtor’s discharge.

Exception to Termination of Collection Activity. When a 

significant enforcement policy is involved, or recovery of a 

judgment is a prerequisite to the imposition of administrative 

sanctions, agencies may refer debts for further collection action, 

including litigation, even though termination of collection activity 

may otherwise be appropriate. Before terminating collection 

activity, the agency should have pursued all appropriate means of 

collection and determined, based upon the results of the collection 

activity, that the debt is uncollectible. Termination of collection 

activity ceases active collection of the debt. The termination of 

collection activity does not preclude the agency from retaining a 

record of the debt for purposes of: 

 selling the debt, if, in consultation with or at the request of

the agency, the Secretary of the Treasury determines that

such a sale is in the best interest of the United States;

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 pursuing collection at a subsequent date in the event there is

a change in the debtor’s status or a new collection tool

becomes available;

 offsetting against future income or assets not available at the

time of termination of collection activity; or

 screening future government loan applicants for prior

indebtedness.

Agency procedures should require that terminating collection action 

of progressively higher dollar amounts be authorized by 

progressively higher-level agency officials. These procedures 

should also require that the signatures of all agency officials 

participating or concurring in each termination of collection action 

decision be obtained before the action is taken.

DOJ Concurrence for Terminating Collection Action 

Each agency determines when it will terminate collection action on 

its debts in accordance with governmentwide policy, its own 

regulations, authorities, and debt collection strategy. Each agency is 

authorized to terminate active collection on debts with principal 

amounts of $100,000 or less. An agency may terminate active 

collection on debts with principal amounts in excess of $100,000 

only with the concurrence of DOJ, unless the agency has its own 

statutory authority for terminating collection action. If the principal 

amount of the debt is $500,000 or less, and the debt has been 

serviced by Fiscal Service in its Cross-Servicing Program, Fiscal 

Service may approve the termination of collection action. 

If DOJ concurrence is necessary, an agency should make every effort 

to request such concurrence at least one year before the expiration of 

the applicable statute of limitations for collection litigation. DOJ 

concurrence is requested by submitting a completed Claims Collection 

Litigation Report to the Department of Justice, Civil Division, 

Commercial Litigation Branch, 1100 L Street NW, Room 10057, 

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Washington, D.C., 20530. The Claims Collection Litigation Report 

instructions can be found at: 

http://www.justice.gov/sites/default/files/jmd/pages/attachments/2014/1

2/12/cclr_instructions.pdf.

and the form at: 

http://www.justice.gov/sites/default/files/jmd/legacy/2014/05/26/cclr

-form-fillable.pdf. 

As a practical matter, the agency does not need to request 

concurrence from DOJ for termination of collection action if: 

 the agency referred the debt to DOJ for litigation and DOJ

returned the debt to the agency;

 DOJ determined that litigation is not appropriate and

returned the debt to the agency;

 the debt has been discharged or terminated in bankruptcy;

 the statute of limitations for initiating litigation has expired;

or

 the agency determines that the debt is legally without merit

or cannot be substantiated.

The agency should establish: 

 a method to track and follow up on the debts referred to

DOJ for its concurrence with termination of collection

action; and

 procedures to ensure that proper action will be taken based

on the agency’s decision to terminate collection, with DOJ

concurrence. Such action may include passive collection,

write-off, and/or cancellation of indebtedness.

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Suspension of Collection Action 

An agency may determine that certain circumstances warrant 

suspending, rather than terminating, collection action. When 

collection efforts are suspended, the agency, in effect, decides to 

defer its attempts to enforce collection, for a period of time 

specified in its regulations and/or collection strategy. During a 

period of suspension, passive collection action may continue when 

appropriate. 

Collection action should be suspended only when the agency has 

reason to believe that the suspension will enhance the chances of 

recovery, or, at minimum, will not endanger the recovery of the 

debt. Such would be the case if the debtor agrees to repay the debt 

when the debtor’s financial condition improves, as would occur if 

the debtor has been only temporarily laid-off from a permanent job.

The agency should suspend collection action when one or more of 

the following criteria apply: 

1. The agency cannot locate the debtor at the present time.

The agency should attempt to locate the debtor using

available sources as described in Chapter 6, Delinquent

Debt Collection, pages 6-71 through 6-73.

2. The debtor’s financial condition is expected to improve.

Suspension would be appropriate if the debtor owns no

substantial equity in property and is unable to make

payments, but: (a) the debtor’s future financial prospects

justify retaining the debt and the statute of limitations has

not expired or has been tolled; or (b) future collections may

be realized through administrative offset; or (c) the debtor

has agreed to pay the interest accruing on the debt during

the suspension. For example, suspension might be

appropriate where the debtor has indicated that he/she is the

recipient of a trust fund or inheritance and would be willing

to pay interest until receipt of the trust fund or inheritance,

at which time the debt would be repaid in full. Suspension

may also be appropriate when the agency has evidence that

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the collectibility of the debt will improve as the debtor’s 

income potential improves over time (as has been the 

general case with education loans). 

3. The debtor has requested a waiver or administrative

review of the debt. If the waiver review or administrative

review is considered mandatory, and if suspension is

mandated by law or regulation pending such review, then

the agency must suspend collection action until the review

is completed or the waiver granted. Otherwise, the agency

may decide on a case-by-case basis whether to suspend

collection action for the duration of the review. The agency

should not suspend collection when an agency determines

that the request for waiver or review is frivolous or was

made primarily to delay collection.

4. The debtor has filed a petition in bankruptcy. When an

agency learns that a bankruptcy petition has been filed with

respect to the debtor, in most cases the collection activity on

a debt must be suspended unless the agency can clearly

establish that the automatic stay has been lifted or is no

longer in effect. Agencies should seek legal advice

immediately from their legal counsel and, if legally

permitted, take the necessary legal steps to ensure that no

funds or money are paid by the agency to the debtor until

relief from the automatic stay is obtained. In such cases, the

agency may then be able to offset such funds to collect on

the debt. See also Chapter 6, Delinquent Debt Collection,

page 6-57.

The agency’s procedures for suspending collection action should:

 distinguish between the definition and treatment of

suspended and terminated debts;

 describe the specific circumstances in which suspension is

appropriate;

 provide for the review and monitoring of suspended debts

on a regular basis;

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 require that progressively higher-level agency officials

authorize the suspension of progressively higher dollar

amounts of debt, with the signature of each agency official

participating or concurring in the decision included on the

authorizing document;

 provide for obtaining the concurrence of DOJ with the

suspension of any debts whose principal amounts exceed

$100,000, or from Fiscal Service for debts in cross-servicing

whose principal amounts are $500,000 or less; and

 provide for ending the suspension and for either: (1)

reinstating active collection on the debt, or (2) terminating

collection action on the debt, when circumstances warrant

and after review of the specific details at the highest

appropriate agency level.

Note that where a statute requires that the agency suspend 

collection action or when the debtor files for bankruptcy, as a 

practical matter, the agency does not need DOJ or Fiscal Service 

concurrence to suspend collection action. In these instances, the 

agency should seek the review of its agency counsel to assure that 

suspension of collection action is mandated by law. 

Termination and Suspension of Collection Action and Compromise Regarding 

Fraud Claims 

When an agency has a debt arising from fraud, false statements, or 

misrepresentations by a debtor, the agency must ask DOJ for 

authority to terminate or suspend collection action, or compromise 

the debt, regardless of the amount. An agency should consult with 

agency counsel to determine whether action under Title 31, Chapter 

38, “Administrative Remedies for False Claims and Statements” 

(31 U.S.C. §3801 - 3812) is appropriate. 

Regarding write-off and reporting discharges of indebtedness to 

IRS, the same rules apply to fraud debts as apply to generally all 

other types of debts. DOJ approval is not needed by the agency to 

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write-off the debt as currently not collectible. Similarly, no further 

DOJ approval is needed to close-out the debt or report the debt to 

IRS as potential income to the debtor once the agency is given the 

authority to terminate collection action on the debt by DOJ. 

 Write-off

Write-off of a debt should occur when the agency determines that 

the debt has no value for accounting purposes. As previously 

indicated in the overview of this chapter, write-off may occur 

before, concurrently with or after the agency determines that 

collection action should be terminated. Generally, write-off is 

mandatory for debts delinquent more than two years, unless 

documented and justified to OMB in consultation with Treasury. 

However, in those cases where material collections can be 

documented to occur after two years, debt cannot be written off 

until the estimated collections become immaterial. See OMB 

Circular No. A-129, Section V.5. 

All debt must be reserved for in the allowance account, and all 

write-offs must be made through the allowance account. Under no 

circumstances are debts to be written off directly to expense. See 

OMB Circular No. A-129, Section V.5 

Once the agency determines that a debt has no value for accounting 

purposes, it must determine whether or not collection action on the 

debt should continue. Specifically, at the time the debt is writtenoff, the agency must determine whether the debt should be further 

classified as one of the following: 

 Currently Not Collectible (CNC): If the agency

determines that cost effective collection efforts should

continue after write-off, then the debt will be classified as

CNC. Debt collection activities, such as referral to Fiscal

Service for collection action for cross-servicing or TOP,

should continue.

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 Close-out: If the agency determines that collection action is

legally barred or it is no longer cost effective to pursue

collection, the debt should be classified as close-out. In

most cases, the closed-out debt must be reported to IRS as

potential income to the debtor.

Cost effective collection efforts should continue if an agency 

determines that continued collection efforts after mandatory writeoff have some potential to result in collections. This is especially 

true if the debt has not yet been referred to Fiscal Service for 

collection action, as required by the DCIA. See Chapter 6, 

Delinquent Debt Collection. 

In summary, within two years of the date of delinquency, the 

agency should be able to evaluate the likelihood that it will collect 

on a delinquent debt and either: 

 write-off and classify the debt as CNC, which will allow for

further collection action;

 write-off and classify the debt as close-out, which means

that the agency will cease all debt collection activities on the

debt; or

 document and justify why the debt is not being written-off.

If the debt is written-off and classified as CNC, the debt may be 

reclassified as close-out in the future, when all collection 

activities pertaining to the debt cease. 

The agency does not need DOJ approval to write-off a debt since 

the agency is only adjusting its accounting records. Except for 

agencies having independent statutory authority, DOJ concurrence 

or Fiscal Service concurrence as applicable, is required, however, 

when an agency suspends or terminates debt collection action on 

debts over $100,000. See page 7-9 of this Chapter. 

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Pursuit of Collection After Write-off/CNC 

When pursuing collection of a debt after write-off and classification 

as CNC, an agency should: 

 if material to its financial statements, disclose its actions

regarding the pursuit of collection on its written-off debts in

a note to its financial statements (i.e., the agency should

specifically state the amount of written-off debts under

collection and whenever possible based upon historical

experience, the amount it expects to collect); and

 establish accounting procedures to account for collections

on written-off debts (e.g., if the agency receives a one-time

payment on a written-off debt, it may restore the amount

collected as a receivable at the time of collection or credit

the amount to a recovery account; and/or if the payment on

a written-off debt is recurring and/or regular, the agency

should restore the total amount of the debt as a receivable in

both its General and Subsidiary Ledgers and record each

collection as if the debt had never been written-off).

Write-Down 

Rather than writing-off the entire amount of a collateralized 

debt, an agency may write-down the debt to the collateral’s net 

realizable value. The agency may not write-down noncollateralized debts. The agency must appraise the value of the 

collateral in relation to the amount of the debt. If the value of the 

collateral has declined to the point where its liquidation would not 

satisfy the debt in full and there is no other source for the collection 

of the debt, then the agency should reduce the amount of the debt to 

the new appraised value of the collateral. The written down amount 

should be recognized as a loss. For information on real estate 

appraisals, see Chapter 3, Credit Extension, page 3-13. 

As is true for write-off, the agency does not need DOJ concurrence 

to write-down a debt since the agency is simply adjusting its 

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records to more accurately reflect the amount it expects to collect 

through the liquidation of the collateral. 

Close-out Classification and Discharge of Indebtedness/Issuance of 

Form 1099-C 

Close-out Classification. As previously stated, the classification of 

a debt as close-out occurs when an agency, after determining that 

additional future collection efforts on a debt are prohibited or would 

be futile, determines to cease all collection activities on the debt. 

This action may occur concurrently with the initial write-off of a 

debt, or at a later date, depending upon the agency’s own collection 

strategy and its determination that no further collection activity is 

warranted. The determination that a debt should be classified as 

close-out is different than the determination that collection action 

should be terminated or suspended. When collection action for a 

debt is terminated or suspended, there is a determination to cease 

active collection action on the debt. The agency may still pursue 

debt collection activities at its discretion, for example, maintaining 

the debt in TOP. The determination that the debt should be 

classified as close-out occurs only after the agency has 

determined to cease all collection activity on the debt. 

The decision to classify a debt as close-out triggers the need to 

determine if the debt must be reported to the IRS as potential 

income to the debtor on Form 1099-C, “Cancellation of Debt.” 

Close-out and Form 1099-C reporting are linked because both 

actions occur as a result of the agency's decision to cease all 

collection activity. Additionally, the two actions are linked 

because further collection action on the debt is generally 

prohibited once the agency reports the uncollected amount to 

the IRS on Form 1099-C as potential income to the debtor. 

Therefore, before making the decision to cease all collection 

activity and to classify the debt as close-out, an agency must take 

all appropriate steps to collect the debt, including, as applicable: (1) 

TOP, (2) non-centralized administrative offset, (3) referral to Fiscal 

Service, Treasury-designated debt collection centers or private 

collection contractors, (4) credit bureau reporting, (5) 

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administrative wage garnishment, (6) litigation, and (7) foreclosure. 

Typically, once a debt has been through Fiscal Service’s crossservicing process (as described in Chapter 6, Delinquent Debt 

Collection) and returned to the agency, any remaining balance due 

will be classified as close-out. 

Discharge of Indebtedness. After it is determined that the debt 

will be classified as close-out, the amount of indebtedness is 

reported to the IRS as potential income to the debtor via Form 

1099-C, “Cancellation of Debt.” Under the Internal Revenue Code 

(26 U.S.C. § 61(a)(12)), income from discharge of indebtedness is 

defined as “gross income.” Section 6050P of the Internal Revenue 

Code, as amended by the DCIA, requires all Federal agencies and 

private financial institutions to report certain discharged debts to 

the IRS. The reporting requirement covers debts owed by 

individuals, sole proprietorships, partnerships, and corporations. 

Types of debts include those arising from loan programs, as well as 

administrative actions such as the assessment of fines, fees, and 

penalties. 

The discussion that follows concerning reporting discharges of 

indebtedness to IRS contains some of the general rules. For 

more detailed information, agencies should refer to IRS 

regulations 26 CFR 1.6050P-l and any other applicable IRS 

publications and guidance.

Section 6050P(a) of the Internal Revenue Code requires the filing 

of Form 1099-C for discharges of indebtedness of $600 or more. 

IRS regulations list eight identifiable events that trigger the 

reporting requirement. Note that these identifiable events, listed 

below, generally dovetail with the reasons an agency would cease 

all collection activity on a debt and classify the debt as close-out. 

The following are identifiable events that trigger reporting 

discharge of indebtedness to IRS on Form 1099-C:

 a discharge of indebtedness under Title 11 of the United

States Code (bankruptcy). Note that reporting is required

only if the agency knows from information included in its

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books and records pertaining to the debt that the debt was 

incurred for business or investment purposes; 

 a cancellation or extinguishment of an indebtedness that

makes a debt unenforceable in a receivership, foreclosure,

or similar Federal or state court proceeding;

 a cancellation or extinguishment of an indebtedness where a

debtor's affirmative statute of limitations defense is upheld

and can no longer be challenged by appeal, or a cancellation

or extinguishment upon expiration of a statutory period for

filing a claim or commencing a deficiency judgment

proceeding. Note that Federal agencies may still have the

ability to collect by offset after the statute of limitations for

enforcing a claim in court has expired; no Form 1099-C

should be filed if collecting by offset;

 a cancellation or extinguishment of an indebtedness that

occurs when the creditor elects foreclosure remedies that by

law extinguish or bar the creditor's right to collect the debt;

 a cancellation or extinguishment of an indebtedness that

renders a debt unenforceable pursuant to a probate or

similar proceeding;

 a discharge of indebtedness pursuant to an agreement

between the creditor and the debtor to discharge

indebtedness at less than full consideration (a

“compromise,” see page 7-21 of this Chapter);

 a discharge of indebtedness pursuant to a decision by the

creditor, or the application of a defined policy of the

creditor to discontinue collection activity and discharge the

debt; and

 the expiration of the non-payment testing period (generally

a rebuttable presumption of this identifiable event occurs

when the creditor agency does not receive any payment on a

debt for a 36 month lookback period as of December 31).

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See 26 CFR § 1.6050P-1(b)(2) for more information on identifiable 

events. 

When reporting a debt to the IRS, the agency is responsible for all 

of the actions detailed below: 

 the agency should capture and provide to the IRS all

information required by the statute and IRS regulations,

including taxpayer/debtor taxpayer identification number,

date of the final debt disposition/discharge, and amount of

the debt. To obtain a taxpayer identification number, the

agency should request that the debtor complete and return a

Form W-9, “Request for Taxpayer Identification Number

and Certification” available through the Internal Revenue

Service website at www.irs.gov/formspubs or other

applicable form, to the extent authorized by law. The debtor

is obligated to provide this information under the Internal

Revenue Code;

 the agency must report the debt after all collection efforts

have been exhausted. The agency is not obligated to wait to

report a debt until the statute of limitations (SOL) has

expired, even though the expiration of the SOL constitutes a

reason for the debt to be considered discharged;

 the agency must report amounts of $600 or more, but has

the option of reporting amounts less than $600;

 the agency must report the outstanding principal,

administrative costs (but not contingency fees), and

penalties for non-lending transactions. In the case of lending

transactions, only the principal must be reported. In both

lending and non-lending transactions, reporting interest is at

the discretion of the creditor;

 the agency must report any deficiency judgment once the

agency has stopped its attempts to collect on the judgment

(note that once the agency determines to file a Form 1099-

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C, the agency must officially release any judgment relevant 

to the debt); 

 the agency should not report a debt if it has a lien against

the debtor’s property, unless it decides to release that lien.

The agency must notify and obtain the concurrence of DOJ

prior to closing-out a debt with an outstanding lien if the

principal amount of the debt is $100,000 or more;

 the agency must provide the debtor with a copy of the Form

1099-C to be filed or a written statement of the impending

Form 1099-C report by January 31 of the year following the

agency’s decision to stop all collection on the debt; and the

agency must send the Form 1099-C to the IRS by February

28 of the year following the calendar year in which the

identifiable event occurs (March 31 if filed electronically).

Note that IRS regulations provide that reporting is not required 

for the release of one debtor if the remaining debtors are liable 

for the full unpaid amount of the debt. 

For debts referred to Fiscal Service’s Cross-Servicing Program, an 

agency may request Fiscal Service to report the debt to the IRS on 

the agency's behalf. 

Once a debt is reported to the IRS, the agency can take no further 

collection action. It may, however, accept voluntary repayments of 

the debt at any time, without any obligation to notify IRS of a 

change in the debt. For example, voluntary payments may occur 

where a delinquent debtor seeks to satisfy the debt and remove the 

statutory bar from receiving Federal loans or loan guarantees. See 

Chapter 6, Delinquent Debt Collection, page 6-65. The agency 

does, however, have an obligation to notify IRS of debts that were 

reported in error. The agency would handle voluntary payments as 

it would payments received before classification of the debt as 

close-out. 

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Compromise of Debts 

When an agency accepts less than full payment—or in other words 

“compromises” the debt—it may have to follow the requirements 

for termination, write-off, and close-out for the portion of the debt 

released/discharged. When compromising, the agency must 

determine whether the proposed compromise meets appropriate 

standards. See Chapter 6, Delinquent Debt Collection, page 6-23. 

In compromising a debt, the agency must: (a) get approval from 

DOJ to compromise the debt when the principal balance of the debt 

before compromise exceeds $100,000, or, if the debt is $500,000 or 

less and the debt is in Fiscal Service’s Cross-Servicing Program, 

get approval from Fiscal Service unless the agency has independent 

statutory authority to compromise the debt; (b) write-off as closeout 

the amount of the debt forgiven by compromise; and (c) report the 

discharged amount to the IRS on Form 1099-C, assuming the 

requirements of IRS regulations are otherwise met. For example, if 

an agency agrees to accept anything less than the full amount owed 

for a $300,000 debt because the debtor claims an inability to pay, 

the agency must seek DOJ approval for such compromise. If DOJ 

decides not to seek enforcement and approves the compromise, then 

the amount discharged should be written-off as close-out and 

reported to the IRS on Form 1099-C. 

If, however, an agency determines that part of the debt is not owed, 

then the agency does not need to seek DOJ approval to terminate 

collection or compromise such amounts, and the filing of a Form 

1099-C is not required. For example, if a debtor argues that the 

amount of the debt should be $150,000, instead of $300,000, based 

on the debtor's records, and the agency accepts the debtor's 

analysis, then the amount may be adjusted without seeking DOJ 

approval or filing a Form 1099-C. In addition, the agency should 

make an adjustment to the total receivables on the “Treasury Report 

on Receivables Due From the Public” to account for the lesser 

amount owed, rather than report the amount of the reduction as a 

write-off. 

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