Dealing with 1099 Errors - Input Desired

Tax season has started and by now (February 6) we should have our 1099s and W-2s and perhaps a few other reporting forms. We need to review them for accuracy, even forms from the IRS, such as Letter 6419 on the advance Child Tax Credit (see IRS Fact Sheet (FS-2022-5) on possible errors).

Some forms, such as Form 1099-C on cancellation of debt might be correct from the issuer's tax requirements, but not correct for the recipient. For this 1099-C issue, I've blogged on it before (4/13/13 and 6/21/21). The 1099-C instructions also remind the recipient that their debt might not have really been discharged and they should not report the income until the year it has truly been discharged. The IRS doesn't tell the recipient what to do with the 1099-C that isn't reportable. That's too bad because when the recipient figures out it isn't reportable for the year printed on the 1099-C, the IRS doesn't know.

I'm working on a paper for a longstanding activity of the Tax Section of the California Lawyers Association to propose that the IRS create a new form to allow taxpayers to reconcile erroneous reporting forms. Beyond the 1099-C issue, I have the following examples of why a form would help.

Form 1099-K that is way out of line with the recipient's business receipts. Also, starting for this year, there will be more of these forms issued due to the change in the de minimis filing threshold for third party settlement organizations.

Form 1099-INT when the account is owned by more than one taxpayer but only one form was issued.

Form 1099-R for a qualified charitable distribution. While QCD gets noted on the 1040, an explanation on a form might help too.

Form 1098 where the mortgage debt belongs to more than one taxpayer.

What do you think? Any examples you'd like to share with me to support the need for a tax form for reconciling information reports to avoid or hopefully at least lessen the number of notices issued by the IRS asking why the form wasn't fully reported.

Thanks!

Laws Need to Work Together and Make Sense - Fix Section 6050P

I came across a recent case (Gericke v Truist, No. 20-3053 (DC NJ 3/26/21)) that once again highlights the mismatch between the law on Form 1099-C, Cancellation of Debt, issuance and when a debt is actually discharged. 

The District Court of New Jersey issued a ruling that reminds us all (again) that getting a Form 1099-C doesn't mean that the debt was discharged, it just means the lender met one of the seven requirements of the regulations under Section 6050P to issue a 1099-C. So, when a borrower receives a Form 1099-C it is not necessarily clear that the debt is discharged. If not discharged, there is no cancellation of debt income or ability to see if an exclusion under Section 108 applies, such as insolvency.

The Form 1099-C instructions for the borrower includes this confusing statement to illustrate the flaw with the form:

"If an identifiable event has occurred but the debt has not actually been discharged, then include any discharged debt in your income in the year that it is actually discharged, unless an exception or exclusion applies to you in that year."

Who wouldn't understand that?!

This is a problem for the borrower (and their tax adviser) and the IRS. If the Form 1099-C is not reported because the borrower finds out that the lender is still going to continue to collect, the IRS is likely to send a notice of the unreported income.

I think the fix is both with Section 6050P and the Consumer Financial Protection Bureau or other federal agency that handles consumer credit law. But the key body to fix the law, of course, is Congress to change Section 6050P and credit card and consumer borrowing laws so that both define discharge the same and that no 1099-C is required until the debt is truly discharged with a specific form documenting that status. The rules should be synced that a 1099-C is only issued if the debt is truly cancelled. 

Benefits to the tax system of fixing this include not wasting IRS time to issue a notice for not reporting a 1099-C only to have the taxpayer say the debt has not been discharged yet (they have not been released from it). Benefits to borrowers are clarity of the law. The judge in this recent case even acknowledges that this law is beyond what a "common consumer" will understand and is a matter for Congress to fix.

SCA 200235030 (8/30/02) from the IRS also notes that receipt of a Form 1099-C doesn't mean that the borrower has income to report. Instead there needs to be an identifiable event to indicate discharge.

Likely with tough times since March 2020, we will see more debt cancellation and it is important for all parties to be able to handle the tax treatment correction but that requires undertsandable and sensible rules that won't lead to errors.

What do you think?