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2018-02-09 BHPH Advocate

BHPH Advocate




Definition and Requirements


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 different ways.

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 identifiable events.

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 consumer bankruptcy.

·      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 creditor.

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.

Other “identifiable events” can be found at

The 1099-C must be filed by Jan. 31 of the year following the year the identifiable event occurred.

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 lender.

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 repossession.

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.