Regulations Limit Scope of 36-Month Rule Relating to 1099-C Reporting: ACA

The Department of Treasury issued temporary and final regulations relating to 1099-C reporting requirements. These new regulations, effective Nov. 10, 2008, will affect debt purchasers currently required to file 1099-C forms.

Relevant federal regulations require certain entities to file information statements, referred to as a 1099-C Forms, with the Internal Revenue Service (IRS) as well as with a consumer if that entity discharges an obligation to pay a debt over an amount of $600. Amendments to the federal regulations in 2004 clarified organizations engaged in the significant trade or business of lending money must comply with the 1099-C reporting requirements, including debt purchasers.

Federal regulations require that one of eight triggering events must occur in order for an entity to be required to file a Form 1099-C. One such triggering event, referred to as the 36-month rule, occurs when the creditor has not received payment of the debt within a 36-month period.

ACA International and other interested parties suggested the 36-month rule inadvertently requires debt purchasers to file a Form 1099-C even if the debt had not been discharged. The IRS and Treasury Department agreed it is appropriate to limit the application of the 36-month rule to entities for which the rule was originally intended in order to avoid premature reporting of cancellation of debt.

As a result, the new regulations eliminate this triggering requirement for debt purchasers and other entities. Most debt purchasers will no longer be required to file a Form 1099-C based on the sole fact payment was not made on the debt within a 36-month period. Debt purchasers are still required to file a Form 1099-C if another triggering event occurs.

The temporary regulations also provide clarification on filing requirements for debt purchasers in previous tax years. The regulations state debt purchasers who were required to file a Form 1099-C in a tax year prior to 2008 because of the 36-month rule, but failed to do so, the date of discharge of the debt is the first triggering event that occurred after 2007.

In addition, the Treasury Department and IRS are considering issuing guidance concerning requests to clarify the meaning of “stated principal” when it is applied to debt purchasers. A Form 1099-C must be filed for the discharge of a debt, which is any amount owed to an applicable entity, including “stated principal, fees, stated interest, penalties, administrative costs and fines.”

However, only the stated principal must be reported as discharged on Form 1099-C, which poses compliance concerns for debt purchasers who may not have sufficient information to separate the stated principal from other amounts due. ACA International (www.acainternational.org) stressed in its comments to the IRS that because debt purchasers may not receive a breakdown of amounts owed by a consumer, such as principal, interest and fees, this segment of the industry would face difficulty determining how much must be properly reported to the IRS.

View the regulations.