CHAPTER 26. REPORTING DISCHARGE OF INDEBTEDNESS TO THE IRS

26.01 GENERAL

The Department of Veterans Affairs does not make determinations regarding a taxpayer's responsibility to declare discharged indebtedness for tax purposes. The basic responsibility for such reporting is the taxpayer's and arises from Internal Revenue Service (IRS) Code, Section 61(a)(12), which defines discharge of indebtedness as income. However, VA and other Federal Departments and Agencies are required to provide information to the IRS on certain discharged or forgiven debts where the amount is in excess of $600. Income from the discharge of an indebtedness arises in the calendar year in which an obligation is written off; is satisfied at less than face value (compromised); or is forgiven (waiver). Field stations/facilities must report to the IRS certain nonbenefit debts under their jurisdiction which meet the following criteria for "discharged indebtedness."

(1) The debtor must be an individual.

(2) The debt is determined to be uncollectible and is written off, waiver is granted, or some form of formal compromise agreement is reached.

(3) The amount of the debt is $600 or more (amount includes principal, administrative costs, and interest.

(4) The obligation is not discharged in bankruptcy.

26.02 DEFINITION OF A CLOSED OUT ACCOUNT

Treasury Financial Manual Supplement dated January 1989, defines a "closed out" debt as a debt that is determined to be uncollectible and is written off; is satisfied at less than face value; or is forgiven, such as a waiver; and has been reported to the IRS as taxable income to the debtor. A decision to close out the account terminates all collection activity permanently, i.e., the debt will not be reestablished at some future time for further collection action. However, this does not preclude voluntary repayments of a debt at any time.

26.03 FORMS TO BE USED WHEN REPORTING DISCHARGED DEBTS TO IRS

a. Department of the Treasury Form 1099G, Statement for Recipients of Certain Government Payments, will be used to report discharge of indebtedness information to the IRS on calendar year basis.

b. Department of the Treasury Form 1096, Annual Summary and Transmittal of United States Information Returns, will be used to transmit accumulated Forms 1099G to the IRS.

26.04 DISCHARGE OF INDEBTEDNESS NOT REPORTABLE TO THE IRS

The following types of debts are not to be reported to the IRS when written off:

(1) Debts as a result of participation in a VA benefit or home loan program. However, the discharge of a debt against a transferee or vendee debtor will be reported. Also, the discharge of an ineligible hospitalization or humanitarian or emergency care debt will be reported.

(2) Debts, where the payment of funds has already been reported to the IRS for income tax purposes, i.e., salary or payments that are reported on IRS Form 1099 MISC.

(3) Discharge of indebtedness due to death.

(4) Debts which are in dispute and are written off.

26.05 COMPLETION OF FORM 1099G

a. Form 1099G will be prepared in triplicate for each debtor whose debt is discharged by writeoff or whose debt reaches the statute of limitations for enforced collection action. Two or more debts, totaling $600 or more, owed by the same debtor, which meet IRS reporting criteria will be reported on the Form 1099G.

b. General instructions for completion of the Form 1099G are as follows:

(1) Recipient's identifying number: Debtor's Social Security number, if known, is to be inserted. Separate the nine digits in the following manner: 000000000.

(2) Discharge of Indebtedness (Item 5): Principal amount of debt discharged plus administrative costs and interest.

(3) Recipient's name, address and ZIP Code: Provide, at a minimum, the debtor's full name, first name first, middle name(s) or initial(s) second, and last name last. The last known address will also be provided.

(4) Payee's name, address, ZIP Code and Federal Identifying Number: Name and address of station having jurisdiction over the debt. Federal Identifying Number is the same as Employer Identification Number (EIN). Inquiries about the EIN should be made to Central Office, Cash Management Policy Division (047G1). Separate the digits in the following manner: 000000000.

c. A Form 1099G will be prepared and sent to the IRS if either an address or a Social Security number for the debtor is available. The IRS has the capability to identify those debtors whose Social Security number is not known.

d. Copy A of Form 1099G will be sent to the IRS. Copy B will be sent to the debtor. Copy C will be filed in the debtor's claims folder.

e. Copy B of Form 1099G must be mailed out to reach the debtor's last known address by January 31 of each year following the calendar year in which the discharge of indebtedness occurred. Forms 1099G returned as "undeliverable" or where there is no address for a debtor will be filed in the debtor's records. When a Form 1099G is returned, the envelope will be filed along with the returned Form 1099G as evidence of delivery attempt.

26.06 TRANSMITTAL OF FORMS 1099G TO THE IRS

a. Form 1096 will be used to transmit Forms 1099G to the IRS. Form 1096, along with copy A of Forms 1099G, must be mailed to the IRS by February 28 of each year.

b. General instructions for completion of Form 1096 are as follows:

(1) Employer Identification No. Same as Federal Identifying Number report on Form 1099G.

(2) Total number of documents. Total number of Forms 1099G being transmitted.

(3) Payer's name, address and ZIP Code. Payer's name and address should be the same as shown on the Form 1099G.

(4) Regular 1099s and 5498s. Place an "X" in the block under "1099 G 86."

(5) Enter number without taxpayer ID numbers. Enter the number of Forms 1099G without debtor's Social Security numbers. The same Form 1096 may be used to transmit both Forms 1099G with Social Security numbers and without Social Security numbers as long as Forms 1099G without Social Security numbers are bundled separately.

(6) Signature. The Station Finance/Fiscal Officer will sign the Form 1096. Under the signature add the caption "For Department of Veterans Affairs."

c. Form 1096 and Copy A of Forms 1099G will be mailed to the Internal Revenue Service Centers at the appropriate address in Appendix S.

26.07 CORRECTED RETURNS

To insure proper matching of Form 1099G to corresponding amounts on tax returns, pay careful attention to the following instructions.

(1) Form 1096. If you are transmitting corrected Forms 1099G, use a separate Form 1096 and place an "X" in the "Corrected" box.

(2) Form 1099G. On corrected returns, center the words "CORRECTED RETURN" (in capital letters) in the space at the top of the return to the right of the space marked "For Official Use Only" and check the box in the left margin. For paper forms correcting data previously submitted on magnetic tape, diskette, or disk pack, print "CORRECTED RETURNMAGNETIC MEDIA" in the space indicated above and also check the box. Paper returns correcting previously submitted magnetic returns must be sent to the attention of the Magnetic Media Coordinator where the original magnetic return was filed. Be sure to complete all the required data boxes on the corrected return since it supersedes the information previously reported. Also, statements issued to recipients should be identified as "CORRECTED."

26.08 OBTAINING BLANK FORMS

Forms 1096 and 1099G can be obtained through normal ordering procedures from VA Forms and Publications Depot.

26.09 WORK MEASUREMENT CODE (VBA)

End product code 416 will be used to account for time expended in preparation of Form 1099G. Each Form 1099G constitutes one unit of end product.

26.10 INSTRUCTIONS

Fiscal activities are to contact local IRS offices in December or January of each year and obtain current instruction on completing Forms 1099G and 1096.