A multitude of reporting and recordkeeping laws and regulations are required from financial institutions. This article summarizes many of the reports due to the Internal Revenue Service, giving special attention to tax-related information returns. For further information on Currency Transaction Reports, refer to NBA Compliance Handbook, Volume I, Security section, “Bank Secrecy Act & Currency Transaction Reports” article, and for information on TIN-related forms, see Volume II, Deposit Accounts section, “Internal Revenue Service: TIN-Related Forms” article.
FORM 56: NOTICE CONCERNING FIDUCIARY RELATIONSHIP
When a fiduciary relationship begins, the IRS must be notified of such on this transmitted form.
FORM 945: ANNUAL RETURN OF WITHHELD FEDERAL INCOME TAX
This form is used for reporting backup withholding, withholding on gambling winnings, and withholding from pensions, annuities and IRAs (e.g., withholdings reported on Forms 1099 and W-2G). The Form 945 deposit schedule is monthly or semi-weekly, depending of which schedule the IRS notifies the bank to use. Reports are due to the IRS by January 31 of the following year. Monthly remitters use Form 945 and semi-weekly remitters use part of Form 945 and Form 945A.
FORM 1042-S: FOREIGN PERSON’S U.S. SOURCE OF INCOME SUBJECT TO WITHHOLDING
This form reports all payments subject to withholding under Chapter 3 of the Internal Revenue Code, including interest, dividends, annuities and pensions, as well as compensation for personal services. Income to the recipient of $10 or more triggers the reporting requirement. Beginning January 1, 1997, bank deposit interest paid to Canadians must be reported on this form. The report is due to the IRS and to the recipient by March 15 (Note: other types of payments may be reportable on Form 1042 or 1042-S. Also note: to claim nonresident alien status as an exemption requires the bank to obtain an executed Form W-8.).
FORM 1096: ANNUAL SUMMARY AND TRANSMITTAL OF U.S. INFORMATION RETURNS
This form must be submitted with all Forms 1098, 1099 and 5498 that are filed with the IRS, due on or before February 28 of the year following the calendar year for which the return was made. This form is also used in correcting any errors discovered after an information return has been filed with the IRS.
FORM 1098: MORTGAGE INTEREST STATEMENT
This is the report on mortgage interest that recipients in the trade or business must file with the IRS to verify the accuracy of a payor’s claimed mortgage deductions. Amounts of $600 or more trigger the reporting requirement which is due to the IRS by February 28 and to the payor/ borrower by January 31. (See, NOTES 1 and 7 following this article).
FORM 1099-A: INFORMATION RETURN FOR ACQUISITION OR ABANDONMENT OF SECURED PROPERTY
Lenders are required to file informational returns on certain abandonments, foreclosures and other acquisitions of property securing indebtedness. All amounts must be reported, due to the IRS by February 28 and to the borrower by January 31. (See, NOTE 2 following this article)
FORM 1099-B: STATEMENT FOR RECIPIENTS OF PROCEEDS FROM BROKER AND BARTER EXCHANGE TRANSACTIONS
All amounts of sales of redemptions of securities, future transactions, commodities and barter exchange transactions must be reported to the IRS by February 28 and to the recipient by January 31. Starting in 2011, for securities purchased after January 1, 2011, the cost or other basis must be reported in Box 3 of the Form 1099-B and whether the gain is short-term or long-term must be noted in Box 8 of the Form.
FORM 1099-C: DISCHARGE OF INDEBTEDNESS
Discharges of indebtedness of $600 by a bank must be reported. The disclosure applies to all debts discharged after December 31, 1993. The report is due to the IRS by February 28 and to the recipient by January 31. (See, NOTE 3 following this article).
FORM 1099-DIV: STATEMENT FOR RECIPIENTS OF DIVIDENDS AND DISTRIBUTIONS
Distributions (e.g., dividends or nontaxable distributions) paid on stock, and distributions in liquidation of $600 or more, must be reported. Distributions paid on stock of $10 or more trigger reporting requirements, whereas distributions because of liquidation are triggered at $600 or more. This report is due to the IRS by February 28 and to the recipient by January 31.
FORM 1099-G: STATEMENT FOR RECIPIENTS OF CERTAIN GOVERNMENT PAYMENTS
Unemployment compensation, state and local income tax refunds, agricultural payments, taxable grants and discharge from indebtedness must be reported. Unemployment tax refunds of $10 or more must be reported, but the other items are triggered when $600 or more are involved. The report is due to the IRS by February 28 and to the recipient by January 31.
FORM 1099-INT: STATEMENT FOR RECIPIENTS OF INTEREST INCOME
All interest payments of $10 or more per person in the calendar year, except for interest paid on IRA’s, SEP’s or DEC’s, must be reported to the IRS by February 28 and to the recipient by January 31.
FORM 1099-MISC: STATEMENT FOR RECIPIENTS OF MISCELLANEOUS INCOME
Payments of $600 or more for services performed for a trade or business by persons not treated as employees (including rental payments, prizes, awards, fees, commissions and royalty payments of $10 or more) must be reported to the IRS by February 28 and to the recipient by January 31. (See, NOTES 4 and 5 following this article).
FORM 1099-MSA: DISTRIBUTIONS FROM MEDICAL SAVINGS ACCOUNTS
IRS Form 1099-MSA is used to report gross distributions from an MSA to an account holder. The payer is not required to compute the taxable amount of the distributions.
FORM 1099-OID: STATEMENT FOR RECIPIENTS OF ORIGINAL ISSUE DISCOUNT
Original issue discount statements of $10 or more are to be filed with the IRS by February 28 and reported to the recipient by January 31.
FORM 1099-R: STATEMENT FOR RECIPIENTS OF TOTAL DISTRIBUTIONS FROM PROFIT-SHARING, RETIREMENT PLANS, IRA’S, ETC.
All amounts of distributions from a retirement or profit-sharing plan or from an IRA, SEP or insurance contract must be reported if the distribution closed the payee’s account. This statement is due to the IRS by February 28 and to the recipient by January 31.
FORM 1099-S: STATEMENT FOR RECIPIENTS OF PROCEEDS FROM REAL ESTATE TRANSACTIONS
All amounts of the gross proceeds from the sale or exchange of certain real estate must be reported to the IRS by February 28 and to the recipient by January 31. (See, NOTE 6 following this article).
FORM 4419: APPLICATION FOR FILING INFORMATION RETURNS MAGNETICALLY
The bank must file this form at least 30 days before the due date of filing information returns magnetically. After filing, the bank will be given a transmitter control code for each type of magnetic/electronic media to be submitted.
FORM 4804: TRANSMITTAL OF INFORMATION RETURN REPORTED MAGNETICALLY/ELECTRONICALLY
A signed Form 4804 must be sent to the IRS on the same day of the electronic transmission of information returns. If the bank sends information returns with missing TINs and all procedures have been followed to obtain the missing information, the bank is encouraged to send a letter of explanation with this form.
FORM 4789: CURRENCY TRANSACTION REPORT
Currency exchanges in excess of $10,000 that involve cash by, through or to a financial institution must be reported to the IRS within 15 days after the transaction.
FORM 5498: IRA ARRANGEMENT INFORMATION
All contributions, including rollover contributions to an IRA arrangement, SEP or qualified DEC must be reported to the IRS by May 31 and to the participant by May 31 for IRA’s or SEP’s and by January 31 for DEC’s.
FORM 5498-MSA: MEDICAL SAVINGS ACCOUNT INFORMATION
This form is used to report individual arrangement information. Trustees are to file the form to report regular or rollover contributions made to an individual’s Medical Savings Account, in addition to reporting the account’s value.
FORMS 5500, 5500-C, 5500-R: RETURN/REPORT OF EMPLOYEE BENEFIT PLAN
These forms are used to provide general information on Title I or Title II ERISA plans and are due to the IRS by July 31.
FORM 8281: INFORMATION RETURN FOR PUBLICLY OFFERED ORIGINAL ISSUE DISCOUNT INSTRUMENTS
The amount of the original issue discount and the issue date is required to be reported to the IRS within 30 days of OID issuance.
FORM 8508: REQUEST FOR WAIVER FROM FILING RETURNS ON MAGNETIC MEDIA
If a bank must file 250 or more of a particular type of information return, such returns must be filed magnetically or electronically; however, a bank may request a waiver from magnetic/electronic filing by submitting a request to the IRS at least 45 days prior to the due date of the returns. Such a waiver is granted only for each calendar year.
FORM 8594: FORECLOSURES ON A TRADE OR BUSINESS
Although not a part of the information returns program, some foreclosures on a trade or business are to be reported and filed by the bank with its income tax return where there is an “applicable asset acquisition.” An “applicable asset acquisition” includes any transfer of assets where the tax basis is determined by the buyer’s consideration and constitute a trade or business in the hands of buyer or seller; the term also includes foreclosure where repossessed property is a trade or business.
FORM 8809: REQUEST FOR EXTENSION OF TIME TO FILE INFORMATION RETURNS
This form is used by filers who request an extension of time for the furnishing of payee statements to the IRS. Either this form or a letter containing information required in Revenue Procedure 95-36 may be used to request an extension of time.
FORM W-2: WAGE AND TAX STATEMENT
Wages, tips and other compensation, withheld income and FICA taxes, and advance earned income credit payments must be reported to the SSA by February 28 and to the recipient by January 31.
FORM W-2P: STATEMENT FOR RECIPIENTS OF ANNUITIES, PENSIONS, RETIRED PAY OR IRAs
Retirement payments, outside of total distributions, must be reported to the SSA by February 28 and to the recipient by January 31.
FORM W-3: TRANSMITTAL OF WAGE AND TAX STATEMENTS
Contains a reconciliation of income tax withheld which must be reported by February 28. Failure to file informational returns by their due dates may incur a $50 penalty per failure up to a $100,000 penalty limit in one calendar year. The penalty “for failure to make a reasonable attempt to comply” is $100 per failure, with no limit in the aggregate. There may also be incurred a $50 penalty for failure to furnish the informational return to a payee, limited to $100,000 per calendar year. There is also a $5 penalty per return, up to a $50,000 limit per calendar year, for supplying incorrect information on an informational return.
NOTE 1: INFORMATION RETURN FOR ACQUISITION OR MORTGAGE INTEREST STATEMENT (FORM 1098)
The Tax Reform Act of 1984 added § 6050H to the Internal Revenue Code which requires financial institutions receiving $600 or more each calendar year in mortgage interest from a customer to report such payments to the Internal Revenue Service. Both the law and regulations apply with respect to mortgage interest received after December 31, 1984, and are generally effective after December 31, 1984.
Any person who is engaged in a trade or business and who, in the course of such trade or business, receives from any individual $600 or more of interest on any mortgage in a calendar year shall file a reporting return. The reporting requirement is not applicable to interest received from a trust, estate, partnership, association or corporation. The $600 threshold is determined on an obligation by obligation basis: i.e., if interest received on any one obligation is less than $600, reporting is not required even though the aggregate amount of interest received from the customer on all obligations would exceed $600.
Regulations set up a two-tier system in classifying mortgage loans. “An obligation in existence on December 31, 1984, secured primarily by real property is a mortgage unless the lender reasonably classified such obligation as other than a mortgage, real property loan, real estate loan or other similar type of obligation.” As to obligations incurred after December 31, 1987, a mortgage “is any obligation secured all or in part by real property”, including a manufactured home or stock in a cooperative housing development. As of January 1, 1988, a mortgage includes a credit card obligation or line of credit secured in whole or in part by real estate. The term “real estate” includes not only a person’s residence, but also any commercial or agricultural property secured by such person.
“Interest” includes prepayment penalties and late charges (other than late charges for a specific mortgage purpose), but does not include (a) “points;” (b) interest paid by a seller or person related to the seller on a purchaser’s mortgage; (c) nor interest received from a governmental unit. Interest is generally considered received in the later of the calendar year received or the calendar year in which the interest properly accrues. Prepaid interest may be includable if it is fully accrued by January 15 of the following calendar year. In cases where interest may be received on behalf of another, the person first receiving or collecting the interest is required to report (e.g., a servicing bank). When there are multiple borrowers, reports are required on the payor of record, i.e., the individual carried on the books and records of the lender as the principle borrower or “payor of record”. Generally, interest paid by a third party on behalf of the borrower is subject to reporting and is to be considered received from, and reportable for, the borrower.
“Points” are excluded from the reporting requirements until the 1991 information reporting year. The IRS issued two Revenue Procedures and a Revenue Ruling relating to the reporting requirements of mortgage points.
Revenue Procedure 92-11 provides guidance on who is required to report points, and creates a safe harbor for the amount of points that may be reported when the points are received in connection with the financing of the purchase of a principal residence.
Revenue Procedure 92-11 states that the “lender of record” or its “designee” and “no other person” will be treated as the interest recipient who is required to file the information return. That person is also treated as receiving all of the points paid by the borrower in connection with the loan transaction.
A “lender of record” is defined as “the person who is named as the lender on the loan documents and whose right to receive payments from the borrower is secured by the borrower’s principal residence at the time the loan is made.”
A “designee” is a person designated by the lender of record in designation agreement which (a) is in writing; (b) identifies the mortgage(s) for which the designee is to report; and (c) is signed by both the lender of record and the designee. The designation agreement is not filed with the IRS but the lender of record must keep a copy for four years following the close of the calendar year in which the loan is made.
Revenue Procedure 92-11 also creates a “safe harbor” relating to the calculation of points which are reported. For a cash basis taxpayer, the lender of record may report the amount of points which the borrower “paid directly” provided the calculation meets the requirements of Revenue Procedure 92-12 discussed below. Points are not considered “paid directly” if the borrower was loaned the points by the interest recipient as part of the overall transaction. If a “designee” wishes to use this safe harbor, the designation agreement must “contain the designator’s representation that it did not lend the amount to be treated as paid directly by the borrower . . . as part of the overall transaction.”
Revenue Procedure 92-12 sets forth the following five-part test which, if met, will permit a cash basis taxpayer to deduct “points”:
1. Designated on the HUD-1 Statement as Points. The HUD-1 statement must “clearly designate” the amounts as points incurred in connection with the indebtedness. The IRS gives, as examples, designations as “loan origination fees,” “loan discount,” “discount points” or “points.”
2. Computed as Percentage of Amount Borrowed. The amount must be computed as a percentage of the stated principal amount of the indebtedness incurred.
3. Charged Under Established Business Practice. The amounts paid must conform to an established business practice of charging points for loans for the acquisition of personal residences in the area in which the residence is located, and the amount paid must not exceed the amount generally charged in that area.
As an example of an improper charge, the IRS cited designating as points items such as appraisal fees, inspection fees, title fees, attorney fees, property taxes and mortgage insurance premiums when such amounts are ordinarily stated separately on the settlement statement.
4. Paid for the Acquisition of a Principal Residence. The amounts must be paid in connection with the acquisition of the taxpayer’s principal residence, and the loan must be secured by that principal residence.
5. Paid Directly by the Taxpayer. The amounts must be paid directly by the taxpayer and cannot have been borrowed. “An amount is so paid if the taxpayer provides, from funds that have not been borrowed for this purpose as part of the overall transaction, an amount at least equal to the amount required to be applied as points at the closing. The amount provided may include down payments, escrow deposits, earnest money applied at the closing and other funds actually paid over at closing.”
In addition to the above five-part test, Revenue Procedure 92-12 provides four examples of payments that would not qualify as deductible points: (a) points paid in excess of the amount generally charged in the area (e.g., payment of points to “buy down” the cost of money); (b) points paid for loans the proceeds of which are to be used for the improvement, as opposed to the acquisition, of a principal residence; (c) points paid for loans to purchase or improve a second home, vacation home, investment property or any other property that is not a principal residence; (d) points paid on a refinancing loan, home equity loan or line of credit, even though the indebtedness is secured by a principal residence. Revenue Ruling 92-2 addresses the reporting requirements in cases where “points are received directly or indirectly by a mortgage broker in connection with the financing of the purchase of a principal residence.”
The IRS takes the position that such points “are reportable under section 6050H of the Code to the same extent as if paid to and retained by the lender.”
Lenders must furnish reports to both the IRS and the borrower. IRS Regulations state that the return must be made on Form 1098 (with Form 1096 as the transmittal form). The customer is to be furnished with a statement on or before January 31 of the year following the calendar year on which the mortgage interest is received. Forms 1096 and 1098 are to be filed with the IRS by February 28. Regulations also make provision for magnetic media reporting.
As for obligations entered in to after December 31, 1984, bankers must take all reasonable steps to obtain the TIN of the customer or “payor of record” at the time the obligation is incurred. Bankers receiving mortgage interest on obligations of which there are no TINs must, at least annually, request the TINs of such payors.
TIN requests need not be in a separate mailing unless the bank makes no other mailings to the “payor of record” during the year in which the obligation is incurred. Then the bank must request the TIN in a separate mailing. All requests must be made on a separate piece of paper clearly notifying that the IRS requires the furnishing of the TIN in order to verify any mortgage interest deduction. The notification must also state that the payor is subject to a $50 penalty imposed by the IRS for failure to furnish a TIN.
Section 6050H reports may give rise to liability issues should such reports provided to customersgive inaccurate information resulting in an overstatement of mortgage interest paid. Such overstatement could result in an understatement of the taxpayer’s ultimate tax liability. Bankers are cautioned to exercise care to prevent inaccurate methods of accounting when calculating the amount of interest to be reported.
Starting in tax year 2016 (reports commencing in calendar year 2017), the Form 1098 must include “the amount of outstanding principal on the mortgage as of the beginning of the calendar year” as well as the date of origination of the mortgage loan. The revised Form 1098 and Instructions can be obtained at https://www.irs.gov/.
Questions had been raised regarding whether the amount of outstanding principal as of January 1 will need to be updated to reflect a monthly payment received after January 1, but which is credited as of January 1. The IRS has clarified that any payments received after January 1 (such as during the grace period for receipt of monthly payments) are not to be reflected in the outstanding balance as of January 1, nor is a payment that is received prior to January 1, but rejected for insufficient funds after January 1 to be added back to the outstanding balance as of January 1.
Please note that the IRS Form 1098 requires the address of the property securing the mortgage to be provided (See, Box 8). If the property securing the mortgage has no address, a description of the property must be provided (See, Box 9). In such a case, the instructions for Form 1098 indicate that the mortgage holder should “enter the property’s jurisdiction and the property’s Assessor Parcel Number(s) (APN), and provides examples on how to satisfy the property description requirement.
Bankers would be well-advised to consult with the bank’s accountant or legal counsel regarding questions on the implementation of this IRS reporting regulation.
NOTE 2: INFORMATION RETURN FOR ACQUISITION OR ABANDONMENT OF SECURED PROPERTY (FORM 1099-A)
The Tax Reform Act of 1984 added § 6050J to the Internal Revenue Code which requires lenders to file informational returns on certain abandonments, foreclosures and other acquisitions of property securing indebtedness. Although this new reporting requirement is quite comprehensive, bankers should be aware of those situations which are subject to reporting and which are not.
Any person who (in connection with a trade or business conducted by such person) lends money secured by property and who:
1. in partial or full satisfaction of a debt, acquires an interest in property securing such debt; or
2. has reason to know that the secured property has been abandoned;
shall file an informational return. Any personal loan secured by tangible personal property, not held for investment and not used in a trade or business, is exempt from the reporting requirements.
In sum, all secured lending, except consumer lending secured by tangible personal property, is covered by § 6050J. To acquire an interest in property securing such debt: includes all occasions a lender may come into possession of the security, i.e., through judicial process, by repossession or a voluntary surrender. An interest in property is acquired when title is transferred to the lender or the date possession and the burdens of ownership are transferred to the lender, whichever is the earlier. In cases involving a redemption period, the lender is treated as acquiring an interest in the property on the date such period expires. The lender must report if anyone other than the lender purchases secured property at a foreclosure, execution or similar sale. If proceeds of the sale are applied to the loan, the lender will have “reason to know” that the property has been abandoned and must treat such as if abandoned. If no proceeds are applied to the loan, but the lender’s security is terminated, reduced or otherwise impaired by reason of the sale, the lender will be treated as having “reason to know” that the property has been abandoned as of the date of the sale.
The lenders must furnish informational returns to the IRS and the borrower or borrowers similar to reports required to be furnished on interest, dividends or rent. IRS Regulations state that the new reports be filed on Form 1099-A. The borrower is to be furnished with a statement on or before January 31 of the year following the calendar year in which the acquisition or abandonment of property occurred. Forms 1096 and 1099-A are to be filed with the IRS by February 28 of the year immediately following the year a covered acquisition or abandonment occurred. The IRS Regulations also make provision for magnetic media reporting.
A separate return must be made with respect to each borrower on a secured loan. However, only one report is required if the lender knows that the borrowers hold property as tenants by the entirety or that the property is held as community property. The information return filings apply to those covered acquisitions or abandonments of property after December 31, 1984.
Section 6050J reports depend upon the characterization or use of the property. For example, in cases involving personal loans secured by tangible property, a lender will be subject to reporting requirements only if the lender “knows” the property is held for investment or used in a trade or business. The IRS Regulations give examples of such “knowledge” on the lender’s part. In addition, the regulations define several terms used on the report, such as “acquisition”, “description of property” and “fair market value”. If you have questions regarding the implementation of this relatively recent addition to the IRS reporting laws, bankers would be well advised to consult with the bank’s accountant or legal counsel.
NOTE 3: DISCHARGE OF INDEBTEDNESS (FORM 1099-C – CANCELLATION OF DEBT)
I. INTRODUCTION
A. Temporary Regulations
Although the Internal Revenue Code provides that a discharge of indebtedness is potentially includable in the debtor’s gross income, it was not until the passage of the Omnibus Budget Reconciliation Act of 1993 that banks and other covered financial institutions (“banks”) were required by law to report certain discharges of indebtedness to the IRS. On December 27, 1993, the IRS published temporary regulations and issued a notice of proposed rulemaking in the Federal Register. The temporary regulations were effective January 1, 1994, applicable to discharges of indebtedness occurring after December 31, 1993.
Under the temporary regulations, banks that discharge any persons indebtedness of at least $600 in a calendar year must file a Form 1099-C with the IRS. The debt discharge information must be provided to the debtor by January 31 and to the IRS by February 28.
B. Interim Penalty Relief
In response to comments and testimony received by the IRS in public hearings, the agency issued Notice 94-73 to provide interim relief from penalties for failure to comply with certain reporting requirements under the temporary regulations. The notice stated that no penalties would be imposed for the failure to report certain discharges of indebtedness until the later of January 1, 1995, or the effective date of final regulations. No final regulations were issued in 1995. This Notice does not relieve a bank from the duty to file 1099C information returns. Interim penalty relief from failure to report applies in the following circumstances:
The above-listed circumstances do not cover all categories of discharge of indebtedness, e.g., bank does not report a discharge of indebtedness in 1995 because the creditor and debtor agreed that part of a debt would be discharged (penalty for failure to report would apply).
C. Final Regulations
On January 4, 1996, the IRS published final rules in the Federal Register, with an effective date of December 22, 1996. This effective date should not lead you to believe that the rules are not yet applicable. The commentary states that the temporary regulations and the interim relief measure contained in Notice 94-73 will remain effective through December 21, 1996. After December 21, 1996, the temporary regulations will be removed. In addition, no penalties will be imposed for failure to report a discharge of indebtedness occurring after December 21, 1996, and before January 1, 1997, if the failure to report would have qualified for penalty relief under Notice 94-73 had the discharge occurred before December 22, 1996. The final regulations provide thata bank may apply, at its own discretion, any of the provisions of the final regulation to any discharge of indebtedness occurring on or after January 1, 1996, and before December 22, 1996. In the meantime, it is expected that the IRS will be issuing uniform procedures to guide bankers who request extensions of time within which to file information returns with the IRS and related statements to taxpayers.
II. REVIEW OF REPORTING REQUIREMENTS UNDER THE FINAL RULE
A. Who Must Report?
The new reporting requirements apply to discharges of debt by banks, thrifts, trust companies, credit unions and any of their affiliates subject to supervision by a federal or state bank regulatory agency.
B. What Must be Reported?
The canceling of debt owed to the bank must be reported if the amount of the debt discharged during a calendar year is at least $600. The reporting requirements apply to the discharge of debts to individuals, trusts, estates, partnerships, associations, companies or corporations and apply to all types of loans. If a debt involving more than one debtor is discharged, an information return must be filed for each debtor that had a debt of $600 or more discharged.
To reduce the reporting burden on banks, the IRS regulations contain two exceptions relating to multiple debtor reporting. For indebtedness of less than $10,000 incurred on or after January 1, 1995, that involves multiple debtors, reporting is required only for the primary (or first-named) debtor. Also, to avoid duplication the regulation provides for a husband-wife exception to the requirement for reporting in the case of multiple debtors. Under this latter exception, only one Form 1099-C must be prepared if the lender knows, or has reason to know, that the co-obligors were husband and wife living at the same address when the indebtedness was incurred, and does not know or have reason to know that such circumstances have changed at the time of the discharge. These two exceptions apply to discharges of indebtedness after December 31, 1994.Multiple discharges of debt of less than $600 during a calendar year need not be aggregated for reporting purposes, unless the separate discharges are pursuant to a plan to evade the reporting requirements. If multiple debtors are jointly and severally liable for the debt, the information return must reflect the entire amount of debt discharged.
Note that indebtedness owned by a partnership is treated as owned by the partners. In the case of a guarantor of an indebtedness (when the underlying indebtedness is discharged), the guarantor is not treated as a debtor, and therefore, reporting for guarantors is not required.
C. What is Indebtedness?
For purposes of the reporting requirements, a debt is any amount owed to the bank, including stated principal, stated interest, penalties, administrative costs, and fines. The amount of debt discharged may represent all, or only a part of the total amount owed to the bank. The entire amount of indebtedness discharged must be reported, even if the reporting institution knows that the debtor qualifies for an exclusion from income under applicable tax laws (e.g., debt discharged in bankruptcy).
D. Discharge of Indebtedness
A debt will be considered discharged upon the occurrence of an “identifiable event” that is listed in the regulation, taking into account all the facts and circumstances.
An “identifiable event” includes, but is not limited to:
1. A discharge of indebtedness in a bankruptcy proceeding;
2. An agreement between the bank and the debtor to discharge a debt (including an agreement which results in an exchange under the Code), provided that the last event necessary to effectuate the discharge has occurred;
3. A cancellation or extinguishment by operation of law which renders the debt unenforceable (e.g., expiration of the statute of limitations for collection of the debt). A bookkeeping entry, (such as a deduction for book or regulatory reporting purposes, or a partial or full bad debt deduction for tax purposes) is not, of itself an “identifiable event”. However, a bookkeeping entry is one of the “facts and circumstances” that is to be taken into account in determining whether or not a discharge has occurred. Similarly, a bank’s collection activity is but one of the “facts and circumstances” that is to be taken into account in determining whether a discharge has occurred. For purposes of determining whether part of a debt has been discharged, a bank’s efforts to collect the remaining balance of the debt are to be disregarded.
The final regulations also addressed four problem areas as to what constitutes a discharge for the purposes of reporting.
1. Consumer Bankruptcy Exception
The final regulations make an exception from reporting in cases involving certain bankruptcy discharges. Indebtedness discharge in bankruptcy is required to be reported only if the creditor knows that the debtor incurred the indebtedness for business or investment purposes. This means that reporting is not required for consumer debts discharged in bankruptcy or in cases when the creditor is not aware of the purpose for the borrowing or that purpose is not clear.
Information relating to whether a debt was incurred for business or investment purposes will be available to a creditor in some cases, such as those in which loan documents require the borrower to state the purpose of the loan. The reason for the consumer exception is due to the fact that there are no tax consequences where the discharge in bankruptcy is a discharge of a consumer debt.
2. Expiration of Statute of Limitations for Collection
The final regulations recognize that lenders may continue collection efforts even after the statute of limitations has run and therefore provides that a Form 1099-C must be filed only if, and at such time as, a debtor has raised the expiration of the statute of limitations as a defense and that defense is upheld in a final judgment or decision of a judicial proceeding and the period for appealing the judgment or decision has expired.
3. Other Discharges by Operation of Law
The final regulations recognizes four types of discharges by operation of law that will trigger reporting requirements: (1) a cancellation or extinguishment of an indebtedness that renders a debt unenforceable in a receivership, foreclosure, or similar proceeding in a state or federal court; (2) a cancellation or extinguishment of an indebtedness upon the expiration of a statutory period for filing a claim or commencing a deficiency judgment proceeding; (3) a cancellation or extinguishment of an indebtedness that renders a debt unenforceable pursuant to a probate or similar proceeding; and (4) 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. The regulation provides that a discharge of indebtedness not listed above is not required to be reported.
4. Collection Activity
The final regulation provides that an “identifiable event” occurs and reporting is required when the creditor decides, or the application of a defined policy of the creditor is triggered, to discontinue collection activity and to discharge the indebtedness. A defined policy may be either a written policy or established business practice. The regulation sets forth a rebuttable presumption that an “identifiable event” was occurred during a calendar year if a creditor has not received payment on a debt at any time during a 36 month testing period ending at the close of the year. This means that you may have to come forward to rebut this presumption by establishing that you or a collection agency representing your bank, have been involved in a significant, bona fide collection activity at any time during the 12 month period ending at the close of the calendar year following the expiration of the 36 month testing period or if facts and circumstances exist as of January 31 of the calendar year following expiration of the 36 month testing period indicating that the debt has not been discharged. The IRS gets specific in determining what is a significant, bona fide collection activity. Collection activities (e.g., automated mailing) is considered nominal or ministerial.
E. Content of Reporting Requirements
Discharges of debt must be reported by the bank on an IRS Form 1099-C. The information return must include the following information:
1. The name, address and TIN of each person for which there was an “identifiable event” during the calendar year;
2. The date on which the “identifiable event” occurred;
3. The amount owed to the bank, including stated principal, stated interest, penalties, fees, fines, and administrative costs;
4. An indication whether the “identifiable event” was a discharge of indebtedness in bankruptcy, if known; and
5. Any other information required by Form 1099-C or the form’s instructions or current revenue procedures.
The reporting institution must also furnish to each person whose name is shown on the return, a written statement that includes the following information:
1. The information set forth immediately above in items 1-5;
2. The name, address, and TIN of the bank required to file the return; and
3. A legend identifying the statement as important tax information that is being furnished to the Internal Revenue Service, and informing the debtor about a possible negligence penalty or other sanction for failure to report taxable information.
F. Timing
The 1099-C form must be filed with the IRS on or before February 28 of the year following the calendar year in which the debt was discharged. Copy B of the 1099-C (or a valid substitute statement) must be provided to the person whose name is shown on the return on or before January 31 of the year following the calendar year in which the debt was discharged. The requirements for filing information returns on magnetic media apply to 1099-C filings.
If a discharged indebtedness reportable under these regulation occurs in a transaction reportable under Section 6050 (relating to foreclosures and abandonment of secured property), both Form 1099-A (acquisition or abandonment of secured property) and Form 1099-C (cancellation of debt) must be filed.
G. Record Retention
Banks must retain a copy of the data required to be on the Form 1099-C, for at least four years from the date the return is required to be filed with the IRS.
H. TIN Solicitation Requirements
Banks must make reasonable efforts to obtain the TIN of the person whose indebtedness is discharged. For purposes of this regulation, the TIN may be obtained at the time the debtor incurs the debt. However, if the TIN is not obtained prior to the time the debt is discharged, the TIN must be requested of the debtor for purposes of meeting the requirements of this regulation. A request for TIN made after the debt is discharged must also clearly notify the debtor that the IRS requires the debtor to furnish its TIN and that failure to furnish such TIN will subject the debtor to a $50.00 penalty to be imposed by the IRS. While no particular form is required to solicit the TIN, a request made on Form W-9 satisfies the reasonable efforts requirement of this regulation.
I. Penalties
The penalty for failure to file an information return with the IRS is $50 (up to an annual maximum of $250,000) and the penalty for failure to furnish a copy of the form to the borrower is $50 (up to an annual maximum of $100,000). These penalties may be waived if the failure is due to reasonable cause and not willful neglect. In the case of intentional disregard of the filing requirements, the penalty is set at a minimum of $100 per failure with no annual limitations.
III. REVIEW OF REPORTING REQUIREMENTS UNDER THE FINAL RULE
The Internal Revenue Service (IRS) has issued an announcement (Announcement 2020–12) notifying lenders that they should not report the amount of qualifying loan forgiveness for covered loans to qualifying small businesses made under the Paycheck Protection Program (PPP). The IRS Code generally requires lenders to form file a Form 1099–C (Cancellation of Debt) for any discharge of indebtedness of at least $600. However, the IRS’ announcement specifies that when a portion or all of the principal of a PPP loan is forgiven under the requirements of Section 1106 of the CARES Act, lenders, for federal income tax purposes only, are not required to, and should not “file a Form 1099–C information return with the IRS or provide a payee statement to the eligible recipient under Section 6050P of the Code as a result of the qualifying forgiveness.” The filing of such an information return with the IRS could result in the issuance of an under reporter notice (IRS Letter CP2000) to an eligible recipient, and the furnishing of such a payee statement to an eligible recipient could cause confusion.
NOTE 4: MISCELLANEOUS INCOME REPORT (FORM 1099-MISC)
In general, payments of $600 of more for services performed for a trade or business by persons who are not employees (including prizes, awards, fees and commissions), rental payments and royalty payments of $10 or more, must be reported to the IRS by February 28 and to the recipient by January 31 of the year following the calendar year for which the return was made.
Pursuant to the Internal Revenue Code, any person engaged in a trade or business and making payments in the course of such trade or business to another person for rent, salaries, wages, premiums, annuities, compensations, remunerations or other fixed or determinable gains, in an amount of $600 or more in a taxable year, must file an Information Return with the IRS and furnish a copy to the recipient. Form 1099-MISC sets forth the amount of such gains, profits and income as well as the name and address of the recipient of the payment. Form 1099-MISC covers recipients of payment of services, rents and so forth. This Information Return does not apply to payments of corporate dividends, wages, salaries and other compensation of employees, distributions from pension and profit sharing plans, interest payments or payments to non-resident persons, as all such payments are subject to informational reporting on forms other than Form 1099-MISC.
The following sets forth some examples of what should be reported on Form 1099-MISC:
It should be noted again that wages and salaries, commissions, prizes or awards for services rendered by employees of the bank are not subject to the Form 1099-MISC Return, but should be reported on Form W-2.
NOTE: IRS Regulation, Section 1.6041-3(c) exempts 1099-MISC reporting when payments are made to incorporated entities. The above information serves to review and summarize activities which may require the Form 1099-MISC Information Return. Should you have specific concerns as to what may or may not be required for reporting, we would advise bankers to seek professional assistance from the bank’s legal counsel or accountant.
NOTE 5: INFORMATION RETURN FOR ACQUISITION OR IRS REPORTING CONSTRUCTION LOANS (FORM 1099-MISC)
The IRS issued Revenue Ruling 93-70 which addresses Form 1099-MISC reporting requirements for lenders serving as escrow agent in connection with contractor/subcontractor payments made pursuant to a construction loan. The Ruling mandates that payers are, and have been, required to comply with information reporting requirements whenever a reportable payment is made in the conduct of their construction disbursement activities. Under this ruling, if the escrowing bank performs “oversight functions” and makes payments in excess of $600 on behalf of the owner/general contractor, the bank must file a 1099-MISC information return.
While banks are generally excepted from reporting payments made to principals, this exception does not apply to the collection of items on a regular and continuing basis under an escrow, trust, custody or investment advisory agreement. Other IRS regulations indicate that reporting is required when a lender assumes a management function or retains the collected funds under an arrangement other than the customary depositor relationship. Please note that IRS regulations exempt payments made to a corporation from this reporting requirement.
II. REVENUE RULING 93-70
Under Revenue Ruling 93-70, the IRS addressed the issue of whether an escrow agent is required to file information returns for payments made on behalf of the owner and general contractor of a construction project when the escrow agent performs an “oversight function” in connection with such a project. This Ruling involved a bank that entered into a construction fund disbursement agreement with an owner and general contractor of a real estate construction project. Under the agreement, the owner assigned funds borrowed for the project to the bank, as trustee, and the bank maintained the funds in a separate non-interest bearing escrow account for each project. The bank sent out checks from the escrow account to pay for labor, materials, services, and other costs and expenses incurred by the general contractor or a subcontractor in connection with the construction project. The real estate construction project utilized a voucher system. Disbursement orders were received from the general contractor requesting reimbursement for expenses paid by the general contractor, or the orders directed payment to be made to a subcontractor. Checks were drawn by the bank on the escrow account to pay expenses. Upon completion of the project, the remaining escrow funds were returned to the owner.
Under the agreement, the bank performed an “oversight function” to insure that loan proceeds were applied properly and all approved bills were paid. In this capacity, the bank conducted site inspections to ensure that work had been completed. When the bank found work to be incomplete, it withheld payments. The bank also evaluated and assessed the cost of the project, including changes considered during the project and forwarded any concerns to the owner and general contractor.
The Ruling held that a bank, in its role as escrow agent, must report disbursements made to contractors on Form 1099-MISC. The IRS found the bank to be performing a management function and that the bank had retained escrow funds under an arrangement other than the customary depositor relationship. The bank was deemed to be performing an “oversight function” in (1) maintaining owner-provided funds in an escrow account for use in connection with a construction project; (2) performing an oversight function with respect to that project; and (3) making disbursements from the escrow account to the general contractor or the appropriate subcontractor.
III. RETROACTIVE APPLICATION
The IRS has taken the position that this Ruling applies retroactively and that banks and other paying agents should have been reporting these items all along. The retroactive aspect of the Ruling allows the IRS to look to the income recipient’s statute of limitations for reporting the income (i.e., three years from the date of filing for individual tax payers) in determining whether a bank has failed to comply with the ruling and the regulations.
In reviewing for compliance, it would appear that the IRS would consider (1) whether the payments were reported on Form 1099-MISC by the owner or general contractors; (2) whether the income recipients reported the payments in income; and (3) whether the payments were made to recipients exempt from the Form 1099-MISC reporting requirements (i.e.,corporations).
A copy of Revenue Ruling 93-70 follows this Note.
REPORTING CONSTRUCTION LOAN PAYMENTS January 12, 1994 IRS REVENUE RULING 93-70 [Code Sec. 6041]
Information reporting: Contractors: Escrow agents: Oversight functions.--
The IRS ruled that escrow agents who perform oversight functions with respect to construction projects and who make payments on behalf of the owners and general contractors of these projects must file information returns for payments of reportable income. This requirement applies regardless of whether the escrow agent is a bank.
Bank reference: § 1305
Issue
When an escrow agent performs an oversight function with respect to a construction project and makes payments on behalf of the owner and the general contractor of the project, is the escrow agent required to file information returns for payments of income reportable under Section 6041 of the Internal Revenue Code?
Facts
X if a bank chartered and supervised under federal law. X enters into a construction fund disbursement agreement with an owner and a general contractor under which the owner assigns to X, as trustee, funds borrowed for a real estate construction project. X maintains the funds in a separate noninterest-bearing escrow account for each construction project.
Under the disbursement agreement, X pays for labor, materials, services, and other costs and expenses incurred in connection with the construction project. Each project uses a voucher system consisting of disbursement orders and lien releases. Disbursement orders received from the general contractor may request reimbursement for expenses paid by the general contractor, or the orders may direct that payment be made to a subcontractor. The checks used to pay the expenses are drawn by X on the escrow account. Any funds remaining in the escrow account after completion of the project are repaid by X to the owner.
X also performs an oversight function under the disbursement agreement to ensure that loan proceeds will be properly applied and all approved bills properly paid in order to avoid mechanics’ or materialmen’s liens. Site inspections are conducted by X to determine whether work has been completed, but not to determine the quality of work. If X determines that work has not been completed, it may withhold payments relating to that work until the work is completed. X also evaluates and assesses the cost of the project, including the cost of any changes considered during the project. X is to communicate any resulting concerns it has about the project to the owner and general contractor so that, if necessary, modifications to the original project or proposed changes may be made or additional funding may be provided by the owner and assigned to X.
Law and Analysis
Section 6041(a) of the Code requires, in part, that all persons engaged in a trade or business and making payment in the course of such trade of business to another person of salaries, wages, compensation, remuneration, emoluments, or other fixed or determinable gains, profits, and income, or $600 or more in any taxable year must provide an information return setting forth the amount of such gains, profits, and income, and the name and address of the recipient of such payment.
Section 1.6041-3(p) of the Income Tax Regulations provides an exception from reporting for payments made to principals by persons carrying on the banking business, and by persons which are mutual savings banks, cooperative banks, building and loan associations, homestead associations, credit unions, or similar organizations chartered and supervised by federal or state law, of funds collected when acting in the capacity of collection agents. Section 1.6041-3(p) states, however, that this reporting exception does not apply to collection of items on a regular and continuing basis under a so called escrow, trust, custody, or investment advisory agreement.
Rev. Rul. 77-53, 1977-1 C.B.368, states, in part, that section 1.6041-3(p) of the regulations requires reporting when an institution assumes a management function or retains the collected funds under an arrangement other than the customary depositor relationship.
In this case, X maintains owner-provided funds in an escrow account for use in connection with a construction project, performs an oversight function with respect to that project, and makes the requisite disbursements from the escrow account to the general contractor or the appropriate subcontractor. Thus, X performs a management function and retains the escrow funds under an arrangement other than the customary depositor relationship. Therefore, X is required to file information returns under section 6041 of the Code with respect to its payment of government funds to participating physicians for the unauthorized care that they rendered under the program.
Holding
When an escrow agent performs an oversight function with respect to a construction project and makes payments on behalf of the owner and the general contractor of the project, the escrow agent is required to file information returns for payments of income reportable under section 6041 of the Code. This reporting requirement applies whether or not the escrow agent is a bank.
Drafting Information
The principal author of this revenue ruling is John J. McGreevy of the Office of Assistant Chief Counsel (Income Tax and Accounting). For further information regarding this revenue ruling, contact Mr. McGreevy on (202) 622-4910 (not a toll-free call).
NOTE 6: INFORMATION RETURN FOR ACQUISITION OR REAL ESTATE TRANSACTION REPORTS (FORM 1099-S)
The Tax Reform Act of 1986 expanded the obligation to report the proceeds of sales of stocks, futures, commodities and barter exchange transactions to include real estate transactions. The reporting requirements apply to covered real estate transactions closed on or after January 1, 1991.
II. WHO MUST REPORT?
The “person responsible for a real estate closing” must file a Form 1009-S information return with the IRS and generally, that “person” is the real estate broker. Absent a broker to the transaction, the reporting responsibility passes as follows. If a RESPA prescribed Uniform Settlement Statement is used, the settlement agent is responsible for the real estate closing and information reporting. If a Uniform Settlement Statement is not used or does not show a settlement agent, the person who prepared the closing statement is required to report. If there are multiple transferors (other than husband and wife) or multiple closings or multiple statements are used or if no closing statement is used, IRS regulations list the order of persons responsible for reporting: (1) attorney for the transferee; (2) attorney for transferor; or (3) the disbursing title or escrow company. If no person is responsible for closing the transaction, then the order of reporting responsibility is: (1) mortgage lender; (2) transferor’s lender; (3) transferee’s broker; or (4) transferee.
III. WHAT IS REPORTED?
Effective January 1, 1991, transactions subject to reporting include the sale or exchange of a present or future interest (for money, indebtedness, property or services) in any of the following items:
IV. WHAT IS EXEMPT?
A real estate transaction is exempt from reporting requirements if the transferor is a corporation, governmental unit or an exempt transferor based on volume or the property is an interest in crops or natural resources, a burial plot or vault or manufactured housing. The sale of a principal residence for $250,000 or less for an individual taxpayer or $500,000 or less for married taxpayers is not subject to reporting when the sale has occurred after May 7, 1997, and each seller has signed a written certification that specific requirements have been met (See, “1099-S Certification” form on the following page).
V. OTHER REPORTS
If a 1099-A information return is filed because of foreclosure or abandonment, a Form 1099-S need not be filed.
1099-S Seller Certification APPENDIX CERTIFICATION FOR NO INFORMATION REPORTING ON THE SALE OR EXCHANGE OF A PRINCIPAL RESIDENCE
This form may be completed by the seller of a principal residence. This information is necessary to determine whether the sale or exchange should be reported to the seller, and to the Internal Revenue Service on Form 1099-S, Proceeds From Real Estate Transactions. If the seller properly completes Parts I and III, and makes a “yes” response to assurances (1) through (4) in Part II, no information reporting to the seller or to the Service will be required for that seller. The term “seller” includes each owner of the residence that is sold or exchanged. Thus, if a residence has more than one owner, a real estate reporting person must either obtain a certification from each owner (whether married or not) or file an information return and furnish a payee statement for any owner that does not make the certification.
Part I. Seller Information
1. Name
2. Address or legal description (including city, state, and ZIP code) or residence being sold or exchanged
3. Taxpayer Identification Number (TIN)
Part II. Seller Assurances
Check “yes” or “no” for assurances (1) through (4).
Yes No
1. I owned and used the residence as my principal residence for periods aggregating 2 years or more during the 5-year period ending on the date of the sale or exchange of the residence.
2. I have not sold or exchanged another principal residence during the 2-year period ending on the date of the sale or exchange of the residence (not taking into account any sale or exchange before May 7, 1997.
3. No portion of the residence has been used for business or rental purposes by me (or my spouse if I am married) after May 6,1997.
4. At least one of the following three statements applies:
The sale or exchange is of the entire residence for $250,000 or less.
OR
I am married, the sale or exchange is of the entire residence for $500,000 or less, and the gain on the sale or exchange of the entire residence is $250,000 or less.
I am married, the sale or exchange is of the entire residence for $500,000 or less, and (a) I intend to file a joint return for the year of the sale or exchange, (b) my spouse also used the residence as his or her principal residence for periods aggregating 2 years or more during the 5-year period ending on the date of the sale or exchange of the residence, and (c) my spouse also has not sold or exchanged another principal residence during the 2-year period ending on the date of the sale or exchange of the residence (not taking into account any sale or exchange before May 7, 1997).
Part III. Seller Certification
Under penalties of perjury, I certify that all of the above information is true as of the end of the day of the sale or exchange.
February 17, 1998 34 1998-7 I.R.B.
NOTE 7: ESCROW ACCOUNTS AND REPORTING (FORMS 1099 OR 1098)
Whether a 1099 or 1098 should be prepared in connection with an escrow account handled by the bank is a question best summarized as follows:
(a) a 1099 (reporting a taxpayer’s receiptof interest) is not required where the bank: (1) does not pay intereston the escrowed funds; and (2) where the interest is paid by an individual.
(b) a 1099 is required if: (1) the entity paying the interest is a corporation, partnership or other business entity; or (2) the bank actually pays interest on the escrowed funds.
(c) a 1098 (reporting a taxpayer’s payment of mortgage interest) will be filled out on escrow accounts and mailed to the person who paid interest under the escrow arrangement.
Where the bank acts as a escrow agent in a contract-for-deed situation, the bank must prepare a 1098 showing mortgage interest paid by the buyer. While the bank must prepare a 1098 form for the buyer, the bank need not prepare a 1099 form(showing interest paid to the seller) unless the bank pays interest on the funds in the escrow account.