Form 1099-C Posted on April 23, 2025 - 1:58 pm by sahilk What is Form 1099-C? Form 1099-C (Cancellation of Debt) is an IRS form that is used to report cancelled debt worth $600 or more to the IRS. Taxpayers who had their qualifying debt cancelled are sent a copy of 1099-C by their lender or creditor. Common scenarios include canceled credit card debt, repossessed vehicles, or foreclosed real estate. What is “Cancelled Debt”? The IRS classifies a debt as “cancelled” if it falls under the specific conditions called “identifiable events.” Each event is assigned a specific code (A–H), which has to be entered in Box 6 of the 1099-C form. Bankruptcy Discharge (Code A) If a debt is discharged through bankruptcy proceedings. Receivership, Foreclosure, or Court Ruling (Code B) If a debt is cancelled through a court proceeding. Expiration of Statute of Limitations (Code C) If a court rules that a debt cannot be collected due to expired legal time limits. Foreclosure Barred by Law (Code D) If a lender chooses foreclosure over collection and is legally barred from further debt collection. Debt Canceled in Probate (Code E) If a debt becomes unenforceable due to probate or similar legal proceedings. Debt Settlement Agreement (Code F) If a debtor and creditor agree to settle a debt for less than the full amount, the canceled portion must be reported. Creditor Policy to Stop Collection (Code G) If a creditor has a written policy or standard business practice to stop collecting debts after a set period. Early Discharge Before an Official Event (Code H) If a debt is canceled before one of the identifiable events (A–G) officially takes place. Who Files Form 1099-C? Form 1099-C can be filed by the following: Financial institutions Credit union Federal Deposit Insurance Corporation National Credit Union Administration Federal executive & government agencies Military departments U.S. Postal Services Postal Rate Commission Subsidiaries of a financial institution or credit union Finance company or credit card company Filing Form 1099-C The IRS requires Form 1099-C to be filled out accurately, with each box and section reporting specific details about the canceled debt. Box 1: Date of identifiable event The date the debt was forgiven or canceled. Box 2: Amount of debt discharged The amount of debt that was cancelled. Box 3: Interest, if included in box 2 Any interest included in the canceled debt in box 2 Box 4: Debt description Description of the origin of the debt Box 5: Check here if the debtor was personally liable for repayment of the debt If the debtor was personally liable for repayment. Box 6: Identifiable event code Report the nature of the debt with appropriate code Box 7: Fair Market Value (FMV) of property FMV of any property associated with the cancelled debt.
Chapter 4 Withholding Posted on April 23, 2025 - 1:54 pm by sahilk What is Chapter 4 of FATCA? Chapter 4 of the Foreign Account Tax Compliance Act (FATCA) outlines the provisions on the withholding and reporting requirements for foreign financial institutions (FFIs) and non-financial foreign entities (NFFEs). It offers clear guidelines on when a withholding agent is required to withhold tax and when the withholding doesn’t apply. In simpler terms, Chapter 4 sets the rules for both withholding and exemption from withholding. It offers clear guidelines for FFIs and NFFEs on what they need to do to prevent withholding. Foreign Financial Institutions (FFIs) Under Chapter 4, Foreign Financial Institutions (FFIs) need to report information about U.S. account holders to the IRS. This includes both individual and entity accounts. It is necessary to submit details such as the account holder’s name, address, TIN, account balances, and income. FFIs must first register with the IRS in order to be issued a Global Intermediary Identification Number (GIIN). This number will serve as proof of compliance with FATCA rules. They can avoid withholding tax on payments from U.S. sources using this identification number. Non-Financial Foreign Entities (NFFEs) Non-Financial Foreign Entities (NFFEs) are also covered under Chapter 4. These entities must report to the IRS whether or not they have U.S. account holders or U.S. owners. There are two types of NFFEs: active and passive. The majority of an NFFE’s revenue comes from passive sources like interest or dividends. While active, NFFEs generate income primarily from operational activities. Between the two types, passive NFFEs are subject to stricter reporting requirements. Withholding Tax on U.S. Source Payments Both NFFEs and FFIs that fail to meet FATCA requirements may be subject to a 30% withholding tax. This includes payments such as interest, dividends, and other income derived from U.S. sources. In order for the withholding to not apply, the FFI or NFFE must meet certain requirements, such as registering with the IRS and providing the proper documentation to show they are compliant with FATCA. A non-compliant NFFE that receives a withholdable payment is also not entitled to a refund or credit of the withheld tax, unless it comes under an income tax treaty.
Chapter 3 Withholding Posted on April 23, 2025 - 1:50 pm by sahilk What is Chapter 3 Withholding? Chapter 3 withholding refers to U.S. tax withholding rules and requirements (under sections 1441-1443 of the Internal Revenue Code) that apply to payments made to foreign persons (non-U.S. residents or entities) such as interest, dividends, rents, and royalties. It was designed to ensure that the U.S. government collects tax on income paid from U.S. sources to foreign persons. It mandates that a 30% tax must be withheld. Since these foreign recipients may not be fully subject to U.S. tax laws or filing requirements, withholding acts as a pre-tax collection mechanism. This withholding is applied unless a tax treaty between the U.S. and the foreign person’s country provides for a reduced rate or exemption. Chapter 3 Withholding Regimes Chapter 3 withholding encompasses three main withholding regimes: Fixed or Determinable Annual or Periodical (FDAP) withholding FDAP withholding applies to payments such as interest, dividends, rents, salaries, annuities, and other types of periodic income. Recipients of this withholding regime are generally taxed at a flat 30% unless they belong to a country that has a trade treaty with the U.S. The person or company making the payment must withhold the tax and send it to the IRS on behalf of the foreign recipient. Foreign Investment in Real Property Tax Act (FIRPTA) withholding FIRPTA withholding addresses gains from the sale of U.S. real property by foreign individuals or entities. Since the U.S. treats those profits like business income, the IRS requires the buyer to withhold 15% of the sale price and send it to the IRS. It applies to items like homes, buildings, land, or even shares in certain U.S. companies that own real estate. Foreign partner withholding Foreign partner withholding occurs when a U.S. partnership makes money from doing business in the U.S. and shares some of that income with a foreign partner (someone who isn’t a U.S. citizen or company). The partnership must withhold taxes based on the partner’s share of the income. The withholding rate is 37% for individual foreign partners and 21% for foreign corporate partners. These rates can sometimes be lower if there’s a tax treaty between the U.S. and the partner’s country. What happens if there’s no withholding? If a person is required to withhold a payment to a foreign person under Chapter 3 but does not do so, that person may become liable for the tax that was required to be withheld. On the plus side, if a person does properly withhold, they’re indemnified against any claims and demands of any person for the amounts withheld. So, at least that’s somet