IRS Removes Three-Year Rule for Reporting Debt Cancellation

Chris Gaetano
Published Date:
Nov 11, 2016

The IRS has long considered debt cancellation as income, with the tax code outlining eight different conditions for when it needs to be reported. The IRS, however, recently removed one of those conditions, a three-year testing period for nonpayment, because taxpayers found it to be confusing, according to The Journal of Accountancy. Generally under the law, financial institutions that cancel more than $600 worth of someone's debt needs to file an information return with the IRS to indicate that the debt has been cancelled. While this generally happens due to the actual discharge of the debt, such as an agreement between the creditor and debtor, the filing requirement could also be triggered in the event the creditor has not received any payments from the debtor for more than three years, unless they can show bona fide collection activity within the past year. If not, then even though the debt has not technically been discharged, IRS rules mandate that the financial institution file the form, 1099-C, anyway, and to inform the debtor of the amounts on the form.  The final rule, does away with this requirement, saying that too often the debtor would interpret the notice as an indication the debt has been cancelled, even though collection activity may still persist. 

The rule is effective for returned file and payee statements furnished after Dec. 31, 2016. 

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