Information-Reporting Developments

The Job Creation and Worker Assistance Act of 2002 (the Act) created some new electronic-filing rules affecting Forms 1098, Mortgage Interest Statement, and 1099. Letter Ruling 200131027 concerns reporting cancellation of debt (COD) income.

Electronic Payee Statements

Act Section 401 allows payors to furnish most Forms 1098 and 1099 electronically, rather than on paper, effective for 2002 forms to be provided in January 2003. Under the new law, the recipient must consent to electronic receipt of the payee statement in a manner similar to that currently permitted under Sec. 6051 for electronic receipt of Form W-2.

The Form W-2 regulations anticipate the use of a website-based technology for delivery. Under the regulations:

• A recipient must consent to receiving the information return electronically;
• All the information required for the form's paper version must be provided in its electronic version;
• The information-return filer must "post" the information return on the website by January 31; and
• The filer must provide notice to the recipient that the information has been posted.

According to the regulations, the recipient's consent must be made electronically, in a manner that reasonably demonstrates that the recipient will be able to access the statement in the electronic format in which it will be furnished. Alternatively, the consent may be made in a different manner if it is confirmed electronically. For example, a bank could not obtain consent from a customer to furnish Form 1099-INT, Interest Income, electronically if the customer does not have access to a computer or to the bank's website on which Forms 1099-INT will be posted.

Before a recipient can consent, the filer must furnish a clear and conspicuous disclosure statement informing the recipient that the return will be provided on paper if the recipient does not consent to receive it electronically. The recipient must also be informed of the scope and duration of the consent (e.g., whether the consent will apply to every future year until it is withdrawn or only for one year). Finally, the recipient must be informed that the consent can be withdrawn at any time by furnishing the withdrawal in writing (either electronically or on paper) to the filer.

As mentioned, the filer, on or before January 31 of the year following the calendar year to which the statement relates, must notify the recipient that the statement is posted on the applicable website. This notice may be delivered by mail, e-mail or in person. The notice must provide instructions on how to access and print the statement, and include the words "IMPORTANT TAX RETURN DOCUMENT AVAILABLE" in capital letters. The good news for information- return providers is that under the regulations, they will not have to confirm that a recipient has logged on to their website and accessed information-return data.

Given the annual cost of processing, printing and mailing information returns, many filers may seek to furnish payee statements electronically. Thus, the ability of individual return preparers to access those information returns is crucial. However, this ability will be limited by a furnisher's reasonable efforts to ensure the confidentiality of any taxpayer information posted on its website.

The new provision is self-executing; the IRS does not have to issue additional guidance before payors can begin to furnish information returns electronically. The new provision applies only to information returns that a taxpayer is required to furnish under any section of subpart B of part III of subchapter A of chapter 61 of the Code. Therefore, even though it applies to most Forms 1098 and 1099, the provision does not apply to Forms 1042-S, Foreign Person's U.S. Source Income Subject to Withholding, Schedules K-1, or possibly certain Forms 1099-R, Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, and 5498, Individual Retirement Arrangement Contribution Information. For example, the provision does not appear to apply to a Form 1099-R or 5498 issued for traditional, Roth and Education IRAs or to Medical Savings Accounts. Additional guidance on this issue is needed from the Service.

Reporting Debt Cancellation

In Letter Ruling 200131027, the IRS determined that COD reporting on Form 1099-C, Cancellation of Debt, is not required under a fee-based contractual agreement between a bank and its customer, to cancel all or a portion of the cardholder's account balance on the occurrence of specified events.

Under the ruling, a bank offers a program to its cardholders under which a cardholder enters into a contractual agreement with the bank. The cardholder pays a monthly fee in exchange for the bank agreeing to cancel a portion of the cardholder's account balance when the cardholder experiences certain events. The ruling concludes that COD reporting is not required under these circumstances; none of the eight identifiable events enumerated in Regs. Sec. 1.6050P-1(b)(2) (under which COD reporting is required) exists. The ruling did not discuss the question of whether the bank may be deemed to have made a payment reportable under Sec. 6041 on Form 1099-MISC, Miscellaneous Income, to the cardholder (equal to the amount of the debt cancelled), which is then deemed returned to the bank.

In Letter Ruling 8930006, the Service had determined that information reporting was required under Sec. 6041 when an insurance company made actual loan payments to the insured's creditors in the event of the insured's unemployment. However, the ruling did not describe how the insurance company would determine the re-portable amount, or whether a bank with its own COD product might be in the same position as an insurance company.

Regardless of whether an information return (either Form 1099-C or 1099-MISC) is required to report COD income, the Tax Court recently held in an unpublished decision that payments to an individual's credit card company by insurance companies were includible in a couple's gross income under Sec. 61 (Khen Thi and Hong Van Huynh). Under this decision, income resulting from payments made under such programs should be reported on an individual's Form 1040; once again, the belief that "if income is not reported on a Form W-2 or 1099, it is not taxable" is proven wrong.

From George Fox, LL.B., CPA, and Debbie Pflieger, LL.B., Washington, DC