COD Reporting No Longer Triggered by Three-Year Nonpayment Period

The IRS finalized a proposed rule issued in 2014 removing the three-year nonpayment testing period from the list of “events” for determining when debt had been discharged for purposes of issuing Form 1099-C, Cancellation of Debt, to taxpayers (T.D. 9793). The proposed regulations (REG-136676-13) were adopted without change, except for the applicability date.

The IRS proposed the change because it believed the application of the rule confused taxpayers and did not increase compliance. Under Sec. 6050P and the prior regulations, cancellation-of-debt (COD) income of $600 or more was required to be reported on Form 1099-C when any of eight identifiable events occurred, one of which was the expiration of the nonpayment testing period. The nonpayment testing period was a 36-month period during which a creditor has not received any payments from the debtor, creating a presumption that an identifiable event has occurred, thus triggering the Form 1099-C filing requirement.

Although creditors were required under the old rule to file Form 1099-C at the end of the 36-month period, it did not necessarily mean the debt had been canceled. As a result, the recipient of the form was often confused about whether he or she must report the amount as COD income if the debt had not actually been discharged.

The proposed regulations stated that the final regulations would apply to returns filed and payee statements furnished after the date the final regulations were published. However, the final regulations change the applicability date, making the regulations applicable to returns filed and payee statements furnished after Dec. 31, 2016.