IRS changes to Form 1099-C
Update on the 36-month rule
TAX ALERT |
On Oct. 14, 2014, the IRS issued proposed regulations that, if finalized, would eliminate the 36-month non-payment testing rule that requires bank lenders to issue Forms 1099-C to borrowers or debtors who have not made payments on their debt for 36 months. This announcement is gaining plenty of attention, but also creating confusion. This summary provides the high-level information you should know right now. Here are some key considerations:
For non-bank lenders
Effective for discharges occurring after Nov. 10, 2008, the 36-month rule does not apply to independently owned finance companies that are not banks, savings and loans or similar entities. This exclusion generally includes direct lenders, entities that purchase installment sales contracts (i.e., indirect auto lending and indirect consumer lenders), finance companies that are part of a "buy here, pay here" group, and entities that purchase charged-off receivables (including credit card receivables). Thus, the IRS announcement relating to the 36-month rule does not apply to these types of entities.
For banks, savings and loans, governmental agencies, etc.
Taxpayers should be aware that the 36-month rule is not dead (yet)—at least for certain entities. Specifically, the elimination of the rules will not be effective until final regulations are published in the Federal Register. The 36-month rule still applies to banks, savings and loans, governmental agencies, and other entities described in section 6050P(c)(1)(A) or (c)(2)(A)-(C).
To be prudent, banks, savings and loans, etc. should assume that the current rule will remain effective for 2014. While the proposed regulations may be finalized before Dec. 31, 2014, taxpayers should keep existing processes in place to identify accounts that might fall under this 36-month non-payment rule.
For additional information on the Form 1099-C requirements, see our white paper, "How should your organization handle 1099-C challenges?"