WASHINGTON (2/15/08)--Cancellation of debt reporting requirements have NOT changed under the Mortgage Forgiveness and Debt Relief Act of 2007 and information to the contrary is just plain wrong, according the compliance experts at the Credit Union National Association (CUNA). Under the act, credit unions still must:
* Fill out the Form 1099-C on home loans in foreclosure; * Fill out the Form 1099-C on home loans where they work out with the borrower a loan modification where less debt will be repaid by the borrower than under the original contract; and * Fill out the Form 1099-C on bankruptcies involving business and investment debt.
"Just keep filing those 1099-C form, as required," says Kathy Thompson, CUNA's senior vice president of compliance. "An ‘identifiable event'--as spelled out in the 1099-C instructions--has occurred, so the form needs to be filed, even though the person may no longer have to pay tax on the amount reported as ‘canceled.'" What does the new law do? Thompson says it temporarily provides that the discharge of indebtedness on mortgage loan "acquisition indebtedness" up to $2 million--secured by the borrower's principal residence--will not trigger federal income taxation. And the law only waives the income taxation for 2007, 2008 and 2009. Thompson explains: A key reason the IRS needs the 1099-C is to start that dialogue with the taxpayer on whether taxes are due or are forgiven under the temporary law. The loan not only must have been secured by the member's principal residence but also had to be "acquisition debt" – money borrowed to buy, build or improve the home. "Debtors who have heard about the new law may be surprised to learn that if they refinanced and used money to buy a car, pay tuition or take a vacation, the new law doesn't provide them tax relief," noted Thompson. "And mortgage loans secured by property that is not the debtor's principal residence aren't covered by the 2007 debt relief act." "But whether the borrower qualifies for tax relief isn't the credit union's concern. Credit unions just need to keep filing the 1099-C any time a debt over $600 is canceled. Don't make any changes in your current 1099-C filing procedures--or if applicable, 1099-A ‘abandonment' forms, Thompson warns. Use the resource link below for more on this and other credit union compliance issues.