The IRS has 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 a Form 1099-C, Cancellation of Debt, to taxpayers. Prior to the change in the rule, individuals would receive a 1099-C after three years, regardless of whether the debt had in fact been cancelled or was still in collection. The final regulations make the new regulations applicable to returns filed and payee statements furnished after Dec. 31, 2016.
The IRS changed the rule because it believed the rule confused taxpayers and did not increase compliance. Under the rule 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 debtor. The eighth, the expiration of the nonpayment testing period, does not actually result from a discharge and may be difficult to determine.
Although creditors were required under the old rule to file Form 1099-C at the end of the 36-month period, it did not mean the debt had necessarily been canceled, or was not being collected by a debt collector. As a result, the recipient of the form was often confused about whether he or she still owed the debt or must report the amount as COD income if the debt had not actually been discharged. The new rule eliminates the 36-month period as an event requiring the filing of a 1099-C.