The American Institute of CPAs has written to the Internal Revenue Service agreeing with the IRS’s proposed guidance governing how to report the cancellation of debt, but suggesting some changes as well.

“We support the Internal Revenue Service’s efforts to address issues surrounding Form 1099-C, Cancellation of Debt,” AICPA Tax Executive Committee chair Jeffrey A. Porter wrote in a letter to the IRS on Monday. “We strongly believe changes are needed to the filing requirements for Form 1099-C.  Specifically, we suggest that IRS require lenders to issue Form 1099-C only upon the legal discharge of a debt, which will occur at the earlier of the expiration of the applicable statute of limitations or when all collection efforts by the lender or surrogate collection organizations have ceased.”

The AICPA letter noted that confusion and misreporting occur because the 36-month nonpayment testing period can result in a Form 1099-C being issued several years after the debt is legally discharged.  The AICPA recommended that the IRS amend the applicable regulations so that a Form 1099-C is issued only for the year that a debt is legally discharged, which would solve the timing problem created by the 36-month testing period.

The AICPA also encouraged the IRS to collaborate with other government agencies involved with credit card and other debts to ensure that the rules for legal discharge of debt are applied so that borrowers do not receive a Form 1099-C if the lender or third party purchaser of the debt intends to continue collection efforts.

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