In 2013 the economy has shown signs of improvement, and for financial institutions this has resulted in an increase of new loans, and, in general, a decrease in real estate foreclosures and loan workouts. As we head into tax season it remains important to remember that foreclosures and workouts which occurred in past years may result in the need to file Form 1099-A (Acquisition or Abandonment of Secured Property), or Form 1099-C (Cancellation of Debt).
The acquisition or abandonment of secured property (real or personal) must be reported on Form 1099-A when the financial institution acquires an interest in the property. An interest is deemed “acquired” for reporting purposes when the title is transferred, or when possession and the burdens and benefits of ownership are transferred. Property is viewed as abandoned for reporting purposes when the facts and circumstances of the situation indicate the debtor has permanently stopped using the property. The requirement that Form 1099-A be provided to the debtor before January 31st of the year after the financial institution acquires its interest in the abandoned or foreclosed property may be complicated by the various foreclosure redemption periods provided by applicable law. For example, a property is foreclosed upon, a sheriff’s sale occurs in November of 2013, and a six month redemption period applies, for the purposes of Form 1099-A reporting the lender has not acquired an interest in the property until the redemption period expires. Therefore, although it appears Form 1099-A should be provided to the debtor for the year 2013, Form 1099-A should not be filed until January of 2015, as the redemption period will not expire until May of 2014.
The cancellation of a debt must be reported on Form 1099-C if an “Identifiable Event” has occurred. Identifiable Events are an occurrence after which a debt is no longer collectible. Identifiable Events are generally related to the financial institution’s voluntarily cancellation of debt, or the cancellation of debt by the passage of time, or by application of law. The requirement that Form 1099-C be provided to the debtor before January 31st of the year after an Identifiable Event occurs may be more difficult to apply when the specific terms of a forbearance agreement are taken into consideration. For example, a forbearance agreement may require a debtor to make a number of payments over a period of time, and if such payments are timely made then, at the end of the time period, the remaining balance on the loan is cancelled by the lender. From a timing standpoint this means that, although a forbearance agreement may have been entered into well before 2013, the debt has not been cancelled until the terms set out in the forbearance agreement have been satisfied. Therefore, Form 1099-C should not be provided to the debtor until the January after the year in which all payments under the forbearance agreement have been completed and the term of the agreement has passed, for this is when any remaining debt has truly been cancelled. Again, since all forbearance agreements are not the same, it is important to understand the terms and conditions under which the specific debt is to be cancelled.
Financial Institutions must report through Forms 1099-A and 1099-C according to precise timing requirements. Debtors must be provided a Form 1099-A or Form 1099-C before January 31st following the year in which the financial institution acquires an interest in secured property of a debtor or an Identifiable Event occurs resulting in the cancellation of a debt. The IRS must be provided with the Forms before February 28th (if filed by mail), or March 31st (if filed electronically), following the year in which the event occurs.
By keeping in mind the complexities discussed above, financial institutions can reduce the risk of inappropriately reporting, or failing to report, the acquisition or abandonment of secured property, or the cancellation of indebtedness. For further explanation of the acquisition or abandonment of secured property, and Identifiable Events, please contact our office or see the detailed IRS Instructions.