WASHINGTON -- In a big win for banks, the Internal Revenue Service last week backed off rules requiring lenders to report discharged debts over $600.

The rules took effect Jan. 1 but were labeled "temporary" while the IRS worked out how best to track borrowers with bad debts. The IRS considers debt forgiveness as income for tax purposes.

In a proposal Dec. 23, 1993, the IRS said it wanted to force creditors to file reports detailing discharged debts over $600.

But banks, thrifts, credit unions, and credit card companies united to defeat the plan in comments on the proposal and at an IRS hearing March 30. Lenders claimed that the cost of tracking customers and filling out these reports could reach $200 million a year.

The IRS's decision Thursday

not to enforce the temporary rules is seen as the first step toward dumping the rules.

"This is going to save the industry a ton of money," said W. Lamar Smith, vice president for government relations here for Visa U.S.A. "I think it probably will transfer into a victory."

"The IRS came to its senses," said James E. O'Connor, tax counsel at the Savings and Community Bankers of America. "They were imposing an unbelievably onerous reporting requirement on institutions where there would have been no appreciable revenue pickup."

Technically, all the IRS said last week was that it would not issue penalities to companies that do not comply with the temporary regulations. The information was released June 30 as advanced notice 94-73. The final notice is scheduled to appear in the Internal Revenue Bulletin 1994-29 on July 18.

Final rules from the agency are expected to require reports on debts that are written off or settled. But Mr. Smith said creditors would have all the information they need.

What financial companies were fighting was the IRS's vague plan to require reports on all debts over $600 that are "discharged," which could mean many different things.

For example, the IRS had proposed requiring these bad-debt reports after the statute of limitations expired and a lender could no longer sue a borrower to recover the funds. That could require lenders to track these laws in 50 states and report debts written off years earlier.

Further, rather than banks or credit card companies reporting debts forgiven in bankruptcies, the IRS could get the information from the courts.

"It would make a lot more sense to have the bankruptcy court report it rather than creditors," Mr. Smith said.

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