WASHINGTON- Lenders can breathe easier, at least for the time being, thanks to an Internal Revenue Service decision to limit the information that must be provided under interim tax rules when debts are forgiven.

Final rules, which should be in place by mid-1995, will likely reflect the eased requirements announced last week by the IRS.

"The temporary regulations were unadministerable," said Angelynn Hall, tax counsel for the American Bankers Association. "They requested things bankers just couldn't do."

Vocal Opposition

The IRS held a hearing in March to address the banking industry's strong opposition to the reporting regulations. This helped trigger the hiatus in requirements, according to Jim O'Connor, tax counsel at the Savings and Community Bankers of America.

"They realized that the game was simply not worth the gamble," said Mr. O'Connor. "These regulations created huge problems; some of them perceptual, most of them real. The agents couldn't audit, and the banks couldn't comply."

The regulations in question affect banks, credit unions, credit card companies, the Resolution Trust Corp., the Federal Deposit Insurance Corp., and any lender that forgives debt.

For the time being, banks will no longer be penalized for failing to report the following: debts forgiven in bankruptcy proceedings, debts erased by statute of limitations expiration, amounts other than the principal amount of a forgiven debt, and information pertaining to persons other than the primary debtor named in an account.

The IRS published notice of the changes June 30.

The IRS created the interim regulations as an interpretation of a statute in the 1993 tax bill that said banks and thrills must report income that results from forgiving debts.

The rules confounded bankers, because much of the information required for compliance was not available to bankers, according to Ms. Hall.

"The IRS wanted reporting of interest and fees and penalties," she said. "Most bankers don't keep records of these things, yet they could still be penalized. They would have to go back and manually recreate the information.

"Banks are very familiar with the reporting system and do excellent compliance, but this had them frustrated because the information just wasn't at their disposal."

Under the temporary regulations, a bank was required to notify the IRS whenever it discharged or restructured a debt, even after a loan's statute of limitations had expired.

States have statutes of limitations which bar creditors from collecting on debts after specified periods of time. And since the limits vary from state to state, bankers were burdened with having to stay current on laws in all 50 states.

"The amount of information we had to track was very burdensome," said Lynda Kern, vice president and corporate tax director at AmSouth Bank in Birmingham, Ala. "Managers in various departments had an additional record-keeping burden. It was very frustrating."

Banks still have a reporting requirement, but the IRS has made this task less daunting by not imposing penalties for any failure to report debt-forgiveness information.

"We have a lot less uncertainty as to what is reportable, and this reduces volume," said Ms. Kern. "We still have to keep track of things, but only to the extent that we can do so reasonably. This is a very welcome move."

"We hope that this interim will give the IRS the freedom to study the issue in depth," Ms. Hall said. "We expect them to be more lenient with the final regulations."

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