Academic journal article Journal of Accountancy

IRS Proposes Scrapping COD Nonpayment Testing Period: The Service Says the 36-Month Period for Reporting Cancellation-of-Debt Income Is Ineffective and Prone to Confusion

Academic journal article Journal of Accountancy

IRS Proposes Scrapping COD Nonpayment Testing Period: The Service Says the 36-Month Period for Reporting Cancellation-of-Debt Income Is Ineffective and Prone to Confusion

Article excerpt

Because the IRS believes that requiring the filing of Form 1099-C, Cancellation of Debt, at the expiration of a 36-month nonpayment of debt testing period "creates confusion for taxpayers" and does not increase tax compliance, the Service released proposed regulations to eliminate the rule.

Under Sec. 6050P and its regulations, cancellation-of-debt (COD) income of $600 or more must be reported on Form 1099-C when any of eight identifiable events occur. Seven of these events are specific instances that actually result in a discharge of debt, such as an agreement between the creditor and the debtor. The eighth, the expiration of the nonpayment testing period, does not actually result from a discharge and may be difficult to determine.

The nonpayment testing period is a 36-month period during which a creditor has not received any payments from the debtor, which creates a presumption that the loan was discharged, thus triggering the Form 1099-C filing requirement. The creditor can rebut this presumption by showing significant, bona fide collection activity or other facts and circumstances that indicate the debt has not been discharged.

The nonpayment testing period was added to the regulations in 1996 in response to creditors' concerns that the prior facts-and-circumstances test for determining when an identifiable event had occurred was not sufficiently clear to allow them to determine when reporting was required. …

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