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Acting to make clear the sensible affect of a COVID aid provision enacted earlier this 12 months, the IRS has introduced in Notice 2022-1 (Notice) that lenders will not be required to, and mustn’t, concern Forms 1099-C when sure student loans are discharged. Lenders and their servicers ought to act now to evaluate their tax reporting procedures for compliance with the Notice.
By method of background, the American Rescue Plan Act of 2021 (ARPA) amended Section 108 of the Internal Revenue Code (Code) to broaden the forms of discharges of student loan debt that will likely be excluded from earnings.
Before the enactment of ARPA, Section 108 of the Code supplied slim exceptions to the overall rule requiring the inclusion of cancellation of indebtedness (COD) earnings. The exceptions utilized to COD earnings from the discharge of student loans:
- in alternate for a provision requiring sure work for a sure interval by sure professionals (e.g., a physician in a public hospital in a rural space), or
- on account of the loss of life or complete and everlasting incapacity of a student.
Relief additionally was supplied for COD earnings ensuing from sure different student loan discharges, akin to loans discharged beneath the Department of Education’s Closed School course of or the Defense to Repayment discharge course of.
ARPA added additional aid by excluding from gross earnings sure discharges of student loans occurring after December 31, 2020, and earlier than January 1, 2026. The new “student loan discharge” exclusion applies to the next forms of loans:
- Loans supplied expressly for post-secondary academic bills if the loan was made, insured, or assured by a federal, state, or native governmental entity or an eligible academic establishment.
- Private training loans (as outlined in Section 140(a)(7) of the Truth in Lending Act).
- Any loan made by any academic establishment qualifying as a 50% charity (for functions of the earnings tax charitable deduction) (most nonprofit faculties and universities) if the loan is made beneath an settlement with any governmental entity (described in merchandise (1)) or any non-public training lender that supplied the loan to the academic group, or beneath a program of the academic establishment that’s designed to encourage its students to serve in occupations with unmet wants or in areas with unmet wants and beneath which the providers supplied by the students (or former students) are for or beneath the course of a governmental unit or a tax-exempt charitable group.
- Any loan made by an academic group qualifying as a 50% charity or by an tax-exempt group to refinance a loan to a person to help the person in attending any academic group however provided that the refinancing loan is beneath a program of the refinancing group that’s designed as described in merchandise (3).
The discharge of a loan made by both an academic establishment or a non-public training lender is just not excluded beneath the above guidelines, nevertheless, if the discharge is on account of providers carried out for both the group or for the non-public training lender.
It is vital to notice that that this provision of ARPA didn’t, by itself, require any student loan to be discharged. The change that ARPA made to the Code with respect to the expanded exception to COD earnings applies solely to how a student loan discharge is handled for tax reporting functions.
To summarize, usually, IRS Form 1099-C is utilized by lenders to report the discharge of indebtedness upon the incidence of sure identifiable occasions. When relevant, the lender should file Form 1099-C with the IRS and furnish the borrower with a duplicate. If the debt that’s discharged is a student loan described above, nevertheless, the Notice supplies that the IRS doesn’t need:
- the lender submitting a Form 1099-C with the IRS, as this might end in an IRS pc generated discover to the borrower of unreported earnings, or
- furnishing a Form 1099-C to the borrower, as this might trigger confusion for the borrower.