Academic journal article ABA Banking Journal

Reporting Debt Forgiveness; Construction-Loan Advances

Academic journal article ABA Banking Journal

Reporting Debt Forgiveness; Construction-Loan Advances

Article excerpt

Two tax compliance matters have been troubling bankers--one has been resolved and the other remains a puzzle.

Construction loan victory

The Internal Revenue Service recently agreed with the banking industry's pleas for relief in the construction credit area. Last year, IRS published Revenue Ruling 93-70, requiring banks to file 1099s whenever they disburse construction loan proceeds through an escrow account to a contractor or sub-contractor. In the past year, IRS agents began penalizing banks for not filing the reports, despite the fact that it had never been an industry practice to do so.

When the revenue ruling came out, it was written in such a way that it applied retroactively--for all years in which bank tax returns remained open. Clearly, such a result was untenable from an administrative point of view--trying to go back over old construction loan files, to track down names, addresses, and Social Security numbers of subcontractors paid by the bank.

After strong industry protest, IRS modified the ruling and made the requirement prospective only for 1994, with no penalties for prior disbursements. The only exception was if the bank had received written notice from the IRS District Director to file the 1099s and had ignored the notice. In such cases, IRS will exercise its discretion regarding imposition of penalties.

Debt forgiveness quandary

New information reporting for debt forgiveness, passed last summer in the Omnibus Budget Reconciliation Act of 1993, has been creating quite a stir. Bank compliance departments are currently operating under the "guidance" of temporary regulations which create more questions than answers.

When the regulations were first published, ABA urged bankers to send their comments to IRS. The outcome has been astonishing. ABA and IRS received hundreds of calls and letters expressing concern, confusion, and outrage over the new reporting responsibilities forced on banks.

The regulations call on banks to create new systems to capture and report information that they do not currently have in their possession, and that they will have no other use for. …

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