Compliance Center: IRS Issues Proposal to Eliminate 36-Month Non-Payment Requirement From Form 1099-C
October 21, 2014
October 21, 2014
The Internal Revenue Service (IRS) has issued a proposed rule that would remove the 36-month non-payment testing period from the list of eight identifiable events that trigger Form 1099-C, Cancellation of Debt. Over the years taxpayers have expressed confusion as to whether the receipt of a Form 1099-C represents cancellation of debt that must be included in gross income. This proposed rule change is intended to clarify this issue. Comments are due January 13, 2015
Existing regulations require that financial institutions report a discharge of indebtedness upon the occurrence of an identifiable event that indicates the debt would never be repaid – whether or not an actual discharge has occurred. The eight identifiable events that trigger information reporting include:
- A discharge of indebtedness under the Bankruptcy Code;
- A cancellation or extinguishment of an indebtedness that renders the debt unenforceable in a receivership, foreclosure, or similar proceeding in a federal or state court;
- A cancellation or extinguishment of an indebtedness upon the expiration of the statute of limitations for collection (but only if, and only when, the debtor’s statute of limitation affirmative defense has been upheld in a final judgment or decision in a judicial proceeding, and the period for appealing it has expired) or upon the expiration of a statutory period for filing a claim or commencing a deficiency judgment proceeding;
- A cancellation or extinguishment of an indebtedness pursuant to an election of foreclosure remedies by a creditor that statutorily extinguishes or bars the creditor’s right to pursue collection of the indebtedness;
- 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 a financial institution and a debtor to discharge indebtedness at less than full consideration;
- 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;
- The expiration of a 36-month non-payment testing period.
The 36-month non-payment testing period event was added to the regulations in 1996 in response to creditors’ concerns that the regulations were unclear regarding the effects of continuing collection activity. Under the existing regulation, a rebuttable presumption arises that an identifiable event has occurred if a creditor does not receive a payment within a 36-month testing period. The creditor may rebut the presumption if the creditor engaged in significant bona fide collections activity at any time within the 12-month period ending at the close of the calendar year or if facts and circumstances indicate the indebtedness has not been discharged.
Source: CUNA Comp Blog
Compliance Question of the Week
If there are two members on a joint account, and one owner acting alone wants us to either close the account or to remove the other member, should we do this?
An account is a contract, and an account with two joint owners is an account between three people: joint owner #1, joint owner #2, and the credit union. Even though joint owner #1 and the credit union agreed to close the account or to remove the other joint owner’s name, if joint owner #2 has not agreed to do this, then the other two people are breaching the contract. However, the credit union can add language to its Membership and Account Agreement that says that one member can close the account. If this language is in the agreement, then the credit union would not be liable if it allows one member to close the account.
National Credit Union Administration (NCUA)
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Office of the Comptroller of the Currency (OCC)
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Office of Foreign Assets Control (OFAC)
OFAC has updated the SDN list as of October 16, 2014. The last update prior to this was September 30, 2014.
Questions? Contact the Compliance Hotline: 1.800.546.4465, email@example.com.
Posted in Compliance.