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Reporting for Discharges of Indebtedness to the IRS

For reporting purposes, the IRS considers indebtedness discharged on the occurrence of an identifiable event indicating the debtor will never have to pay the indebtedness. If appropriate, the lender may report discharges of indebtedness if the indebtedness meets one of the following tests:

A debt discharged in bankruptcy, but only if the debt was for
business or investment purposes;

A debt discharged by an agreement between the financial
institution and the member to accept an amount less than the
full amount of the debt;

A debt that the credit union decided not to pursue through
collection activity and discharges;

A debt on which a 36-month, non-payment testing period has
expired;

A debt extinguished because the statute of limitations the
debtor raised as an affirmative defense has expired;

A debt canceled or extinguished in receivership or foreclosure
in state or federal court;

A debt canceled or extinguished when the financial institution
elects foreclosure remedies; or

A debt canceled or extinguished, rendering it unenforceable in
probate.

(Note: A bookkeeping entry to charge off a loan does not by itself
qualify as an identifiable event.) Lenders should consider the
trigger points above in conjunction with the charge-off to
determine whether a discharge has occurred.
Additional reporting requirements include:

The discharge must be $600 or more, no aggregation;
lenders must provide copy of 1099-C to the borrower by
January 3 1 of the year following discharge; and

lenders must provide original of 1099-C to the IRS by
2/28 of the year following discharge.

Lenders must keep records of the return or the ability to
reconstruct the required data for four years from the required filing
date. For more information, review Section 6050.P of the Internal
Revenue Code.

Source: the NCUA