The banking industry got most of what it wanted last week when the Internal Revenue Service clarified when creditors must report debt discharges.
The final rule, which is in the Jan. 4 Federal Register, lists the circumstances, labeled "identifiable events," under which debt discharges require financial entities to report the writeoff to the IRS. The list applies to banks that forgive more than $600.
The reporting triggers laid out in the rule include discharges of debt under Chapter 11 bankruptcy, the expiration of a statute of limitation, and receivership or foreclosure.
In December 1993, the IRS proposed requiring reporting under just these three events, but also made clear that the list was not exclusive.
This provoked an outcry from industry representatives, who argued that the lack of certainty put them in danger of noncompliance.
"Bankers just needed to know the answers," said Donna Fisher, tax and accounting manager at the American Bankers Association. "This final rule really clarifies things."
However, she added that ABA opposes requiring banks to report when debt is discharged after a statute of limitations runs out.
"We shouldn't have to track that for everyone who owes us, since statutes of limitation are different in every state," Ms. Fisher argued. "We simply wouldn't track that in normal business."
The reporting requirement was included in 1993 legislation because the government considers discharged debt as income subject to taxation. The IRS wants banks to help Uncle Sam track taxpayers.
To give bankers time to comply, the regulation takes effect Dec. 22.