By Shaun Petersen
With all the discussion
surrounding tax reform legislation, the one thing we know for certain is “the
tax man cometh.”
Usually, we reference
that quotation with the day of reckoning that comes each April 15. In this
industry, though, we know the tax man shows up at many different times and in many
Recently, the Internal
Revenue Service has been auditing dealerships for compliance with Form 8300
reporting requirements and auditing related finance companies for compliance
with the issuance of a 1099-C.
A dealer in the southern
U.S. reported an IRS auditor began looking at the RFC’s tax returns from 2009
and noticed the RFC failed to send a 1099-C to customers whose vehicles were repossessed
and the deficiency was not pursued.
The IRS found the RFC
violated the tax code by failing to provide those consumers with 1099-Cs and assessed
fines approaching six figures.
Given the potential
liability an RFC faces, we need to answer some critical questions.
What is a 1099-C? Form 1099-C is a form the IRS requires an “applicable
financial entity” to issue to its borrowers if that financial entity cancels or
forgives a debt greater than $600. The form provides information about the
debtor and creditor, information about the type of debt and amount discharged,
and the fair market value of the property.
Who is required to file a 1099-C? The definition of
“applicable financial entity” in federal law encompasses several types of
financial institutions, including “any organization a significant trade or
business of which is the lending of money.”
That broad definition
captures entities organized as an RFC associated with a Buy Here-Pay Here
dealership. Buy Here-Pay Here dealers who do not have an RFC are not required to file a 1099-C if they forgive a
debt given to borrow to purchase a vehicle off the lot.
When must I file a 1099-C? The trigger to file a
1099-C is based on the cancellation of debt that occurs after any of nine
The most common of
those events in the Buy Here-Pay Here industry are:
A discharge in bankruptcy, but only if the customer uses the
vehicle for business. A 1099-C is not required for discharges in personal
Forgiveness of a debt under an agreement between the RFC and
the debtor to cancel the debt for less than the full balance due. For example,
an RFC might agree to accept $5,000 on a $10,000 balance in satisfaction of the
debt. In that event, the RFC would send a 1099-C for $5,000.
Forgiveness of the debt because of a decision or a defined
policy of the RFC to discontinue collection activity and cancel the debt. This defined
policy can either be in writing or an established business practice of the
IRS has noted if an RFC abandons collection of the debt and stops collection
activity after a particular period of non-payment, that cessation of collection
constitutes a defined policy. For example, the RFC has a policy that it will
attempt collection on all debts for a period of one year and then will cease
all collection attempts on the debt. After that 12-month period, the debt is
considered forgiven, and a 1099-C is required.
events” can be found at www.irs.gov/pub/irs-pdf/i1099ac.pdf.
The 1099-C must be
filed by Jan. 31 of the year following the year the identifiable event
For example, if my RFC
decided to cease collection activities and forgive a consumer’s balance owed in
August 2018, I would be required to file the 1099-C and send a copy to the
consumer by Jan. 31, 2019.
Why must I file a 1099-C? Perhaps the biggest
question to answer is one I get from my youngest child repeatedly: “Why?” Or,
as my teenage daughter might say, “What’s the point?”
The IRS has provided an
explanation from the perspective of the consumer:
If a consumer borrows
money from a lender to buy a car, the consumer was not required to include the
loan proceeds as income because the consumer has the obligation to repay the
But once that
obligation is subsequently forgiven, the amount forgiven is normally reportable
as income because there is no longer any obligation to repay the lender.
Sending out a barrage
of 1099-C forms every Jan. 31 certainly has the potential to adversely affect
customer relations. No one wants to receive notice they may have more tax
liability than they anticipated, particularly when the likely reason for
receiving a 1099-C was the result of an economic hardship resulting in
Angry customers could
take umbrage with the RFC, and perhaps the dealership itself.
But with the IRS aggressively
seeking to enforce these requirements, the cost of non-compliance – up to $100 per 1099-C not filed – is something that cannot be ignored.
Shaun Petersen is
NIADA’s senior vice president of legal and government affairs.