1099-C Tax Form: What to Know

As audit efforts by the Internal Revenue Service increase, a major focus is being put on 1099-C forms for buy-here, pay-here dealers. The issue for BHPH dealers is that 1099-C requirements are complex, and often result in many unnecessary filings. However, failure to understand and comply with the requirements of 1099-C forms can prove costly for dealers who face fines upwards of $200 per omission.

The key to understanding when to file a 1099-C form is whether the dealer collects the receivable or if the dealer has a related finance company servicing the note. In the case that the dealer collects the receivables itself, no 1099-C form is required. For the BHPH dealer with a related finance company, understanding when to file the 1099-C form is necessary to remain in compliance and avoid unwanted fines.

The IRS explains that a 1099-C form must be filed for “each debtor for whom you canceled $600 or more of a debt owed to you if you are an applicable financial entity and an identifiable event has occurred.” More precisely, when to file a 1099-C form can be defined by eight triggering events:

  • A discharge of indebtedness under Title 11 of the U.S. Bankruptcy Code (bankruptcy) for business or investment debt.
  • A cancellation or extinguishment making the debt unenforceable in a receivership, foreclosure, or similar federal or state court proceeding.
  • A cancellation or extinguishment when the statute of limitations for collecting the debt expires, or when the statutory period for filing a claim or beginning a deficiency judgment proceeding expires. The expiration of the statute of limitations is an identifiable event only when a debtor’s affirmative statute of limitations defense is upheld in a final judgment or decision of a court and the appeal period has expired.
  • A cancellation or extinguishment when the creditor elects foreclosure remedies that by law end or bar the creditor’s right to collect the debt. This event applies to a mortgage lender or holder that is barred by local law from pursuing debt collection after a “power of sale” in the mortgage or deed of trust exercised.
  • A cancellation or extinguishment due to a probate or similar proceeding.
  • A discharge of indebtedness under an agreement between the creditor and the debtor to cancel the debt at less than full consideration.
  • A discharge of indebtedness because of a decision or a defined policy of the creditor to discontinue collection activity and cancel the debt. A creditor’s defined policy can be in writing or an established business practice of the creditor. A creditor’s practice to stop collection activity and abandon a debt when a particular nonpayment period expires is a defined policy.
  • The expiration of the nonpayment testing period (commonly referred to as the 36-month rule).

While it is important to file a 1099-C form when required, it is equally important not to file a 1099-C form when one is not necessary. Filing a 1099-C form when one is not needed results in confusion for the customer, and can cause unnecessary upset for a customer who would have returned to your dealership for a future purchase. More importantly, wrongfully filing a 1099-C form may impact the ability for a lender to collect a valid debt. This issue relates to a recent Bankruptcy court ruling in which the court recognized that filing a 1099-C form when not needed indicates that the debt was legally forgiven. As a result, if a borrower inaccurately receives a 1099-C form, it is reasonable for them to argue that the debt was forgiven and any further collection efforts are inappropriate.

It is unclear, however, as to how far back the IRS will go to assess penalties for unfiled 1099-C forms. In most instances the statute of limitations for tax forms begin when the form is filed. Yet there is the issue of the forms that were not filed when they should have been, leaving open the possibility for the statute to extend back to prior years. For independent finance companies, it is clearer just exactly what they are facing because the IRS issued Notice 2001-8, which states, “Independent finance companies are not subject to penalties for failure to file 1099-C forms dating back 2004 or earlier.” Regardless of just how far back the IRS will go to assess penalties, dealers who did not file the proper 1099-C forms are facing penalties of $100 per form not provided to the borrower in addition to $100 per form not filed with the IRS in a timely manner. While these penalties may not seem like much, they add up quickly.