No Debt Payments for 36 Months No Longer Triggers Debt Cancellation Form 1099-C

November 10, 2016

Final regulations remove the requirement that certain financial institutions and governmental agencies issue a Form 1099-C, Cancellation of Debt, when a debtor fails to make a payment for 36 months.

Certain financial institutions and governmental agencies are required to file with the Internal Revenue Service and furnish to the debtor Form 1099-C, Cancellation of Debt, if, during a calendar year, any one of eight identifiable events discharging a debt of $600 or more occurs. Form 1099-C contains information identifying the debtor, the creditor, the amount of the debt discharged, the date of the identifiable event causing the discharge, and certain other information.

The first seven identifiable events in the regulations typically result in the actual discharge of a debt through operation of law, agreement by the parties, or decision by the creditor to cease collection efforts and discharge the debt. Under the eighth identifiable event, a rebuttable presumption that a debt has been discharged arises if the debtor fails to make payments on the debt for the “nonpayment testing period,” which is generally 36 months. Thus, the failure of the debtor to make a payment for 36 months generally requires the creditor to file and furnish a Form 1099-C, even if the creditor has not ceased collection activities and discharged the debt. The creditor may rebut the presumption if the creditor engaged in significant bona fide collection activity at any time within the 12-month period ending at the close of the calendar year or if certain other facts indicate that the debt has not been discharged.

The 36-month nonpayment testing period was first added to the regulations in 1996. The regulations were amended in 2008 and 2009, and in 2012 the IRS issued a notice requesting comments on the rule. The Department of Treasury and the IRS were concerned that the rule creates confusion for taxpayers and does not increase compliance by debtors or provide the IRS with valuable third-party information that may be used to ensure taxpayer compliance. In 2014, Treasury proposed regulations to remove the rule.

The final regulations remove the 36-month nonpayment rule effective for Forms 1099-C required to be filed and furnished after 2016. Forms 1099-C are issued in the calendar year following the calendar year in which the debt is discharged. Thus, expiration of the 36-month nonpayment testing period in calendar year 2016 (that is, the debtor has not made a payment for 36 months before Jan. 1, 2017) will not require a Form 1099-C to be filed or furnished.