1099 Reporting

Filing 1099 A & C in 2012

Get it right. Here's what you need to know.

A financial institution that discharges indebtedness of any person of at least $600 during any calendar year will be required to file an information return (typically Form 1099-C), with a few exceptions noted below:

1. Discharge in bankruptcy unless debt was incurred for business or investment purposes. This rule generally excludes consumer debt.
2. Discharge that is interest only.
3. Discharge of an amount other than stated principal (e.g., fees).
4. Deemed discharge due to related party purchase of debt.
5. Release of co-obligor as long as remaining debtor(s) are liable for debt.
6. Release of guarantee.

If the bank acquires a property, whether by deed in lieu of foreclosure or by foreclosure, in full or partial satisfaction of the loan, an information return must be filed with the Internal Revenue Service (IRS) and provided to the borrower. The IRS form for this type of transaction is a Form 1099-A. This requirement applies to real estate and personal property, such as boats, cars, RVs, etc., which are held for business use. Personal use of tangible property, such as a personal-use auto, does not require a 1099-A.

In the event of a foreclosure and a debt cancelation, you only need to file 1099-C, not both. For example, if your borrower owes $250,000 on a home with a Fair Market Value (FMV) of $150,000 that is transferred to the bank with a deed-in-lieu, there is a reporting requirement. If the remaining debt of $100,000 is forgiven in the same year, a single Form 1099-C can be filed for the year. If the debt is not forgiven until a subsequent year, the reporting is different. File a Form 1099-A in the year the property is acquired, and file a 1099-C in the year the remaining debt is forgiven.

These forms are due each year. There has not been a holiday on reporting these types of transactions. There is a special exclusion on realizing the gain for debts related to one’s principal residence; however, Forms 1099-A and 1099-C are still required. The determination of taxability is made at the borrower level, not at the bank level. The bank, therefore, is still required to file Forms1099A and C.

When to issue the 1099s

Per the IRS Instructions to Forms 1099-A and C, a debt is canceled on the date an identifiable event occurs. The IRS lists eight items that meet the definition of “identifiable event,” including:

• A discharge in bankruptcy under Title 11 for business or investment debt
• A discharge of indebtedness under an agreement between the creditor and the debtor to cancel the debt at less than full consideration

Each of the eight identifiable events results in complete removal of all legal rights of the lender to collect anything further on the debt. This is the point when the debt would be considered canceled in the eyes of the IRS. At the time the debt is canceled, you would stop accruing interest and could issue the 1099-C either on this date or at year-end so long as the borrower receives his or her copies on or before January 31 of the year following the cancellation. For the 1099-A (if the debt is not canceled due to the fact that there are several pieces of property securing the loan or the loan is recourse and you are still pursuing collections for the balance), we would suggest waiting until year-end to complete the 1099-A. This is because the lender will need to issue one 1099-A that contains all of the repossessions of property on a single loan for the taxable year.

A few other items worth mentioning:

• In the absence of clear and convincing evidence to the contrary, the proceeds from the sale of the repossessed asset should be used as the asset’s FMV. These are treated as “payments” on the loans, but must be applied to interest first, then principal.
• If in the same calendar year, you cancel a debt in connection with the repossession of secured property, it is not necessary to file both Forms 1099-A and Form 1099-C for the same debtor. You may file 1099-C only. You will meet your 1099-A filing requirements by completing boxes 4, 5 and 7 on Form 1099-C. However, if you do file both forms, you should not complete boxes 4, 5, and 7 on the Form 1099-C.

In the event you have not filed 1099-As and 1099-Cs for prior years, you may have exposure for penalties. The penalty rate is $50 per 1099 in most circumstances, and there is a maximum penalty that can be issued for each year. The penalty rates have increased for 2012 and years following.

If you have additional questions, contact Jeff Ring in our Financial Services group.