As the year ends, many banks are preparing to issue Forms 1099
for 2012. Beginning in 2013, Form 1099-C will require a new code.
The new codes will show the reason the bank issued the Form 1099-C.
This new requirement provides banks an opportunity to review their
Form 1099-C procedures and to put systems in place to identify the
correct trigger event codes for Form 1099-C.
What Is Form 1099-C?
Form 1099-C is an information return used to report canceled
debt to debtors for tax purposes. A debtor does not have income
when an amount is borrowed. But, if the debtor does not pay the
loan back and the bank forgives part of the loan, then the forgiven
portion of the debt constitutes taxable income to the debtor. For
example, if a customer takes out a loan for $100 and the bank
agrees to discharge the loan for $75, then the customer would have
$25 in forgiveness of debt income. Form 1099-C is generally used to
report this forgiven-debt income. The debtor will generally owe
taxes on forgiven-debt income unless the debtor is able to claim an
exception from taxation, such as for insolvency.
When Do Banks Issue Form 1099-C?
Lenders are generally required to issue Form 1099-C after
certain trigger events on a debt. These events are identified in
tax regulations. Common trigger events include:
Debt settlement agreements
Expiration of the statute of limitations on collecting the
No payments on a debt during a 36-month testing period (unless
the creditor actively engaged in collection activity)
Most other events that would cancel a debt, such as foreclosure
proceedings or probate proceedings.
(Note that many special rules and exceptions apply to the
trigger events, which are not covered in this column.)
Once a trigger event occurs, a bank generally must issue Form
1099-C—_even if the bank still considers the debt
collectible. These trigger events have existed for years, but in
2013 the lender must put a code on Form 1099-C (the
"Identifiable Event Code") to report the event that
triggered the Form 1099-C.
Some lenders hesitate to send Form 1099-C on debts fearing that
the debt will not be collectible after issuing the form. However,
Form 1099-C is a tax form and banks should issue it as required.
Issuing Form 1099-C does not necessarily mean that the lender can
no longer collect a debt, at least according to the tax
regulations. (While some state courts have barred a lender from
collecting a debt if the lender has issued Form 1099-C, the law is
not settled in all jurisdictions. In Wisconsin, there are no
published opinions holding that a Form 1099-C conclusively
discharges a debt.) Accordingly, lenders should send the Form
1099-C after an applicable trigger event.
Which Code to Use on Forms 1099-C Issued for 2012?
The new codes for trigger events appear in the 2012 instructions
for Form 1099-C. Brief explanations of each code are set forth
within the instructions under the section labeled "When Is a
Debt Canceled." The new codes will be input on 2012 Forms
1099-C in Box 6 labeled "Identifiable Event Code."
What Does the New Code Mean for Banks?
With additional information on trigger events, the IRS could
potentially review the codes to determine if banks are properly
issuing Forms 1099-C. For example, if a bank rarely uses a code, it
is possible the IRS could question whether the bank is
under-reporting debts under that code.
These new codes provide an opportunity for banks to review their
Form 1099-C reporting procedures. Banks should review their Form
1099-C processes to ensure that trigger events for each debt will
trigger a Form 1099-C on that debt. Banks should also start
tracking specific trigger events within their systems so that they
can use the appropriate codes on Form 1099-C.
This column is general information and is not legal or tax
advice. It is not intended to be used and it cannot be used to
avoid any tax penalties. Consult your tax advisor with any
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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The following are select tax topics affecting individuals and businesses for tax year 2014. Several issues of significance to individuals and businesses for 2013 remain relevant for 2014 and are noted below.
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