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.