After working for 18 months, the Internal Revenue Service is expected to adopt and publish final rules on debt-discharge reporting by July 1.

The rules, proposed in December 1993, are going through final clearance before publication in the Federal Register, according to IRS officials. They will take effect next January.

Under the controversial rules, a bank that forgives more than $600 of debt must report it to the IRS. The bank also is required to send the customer a form that must be filled out and returned to the IRS.

Besides the paperwork involved, once a bank tells the IRS that a debt has been discharged, the bank loses all rights to collect the money.

'Banks have been complying with these requirements since Jan. 1, 1994, when the IRS issued temporary regulations.

Two main changes are expected to be made to these stopgap rules, according to Cheryl Riedlinger, a lawyer with the Tax Reporting Group, High Point, N.C. Ms. Riedlinger, who gives legal advice on tax issues to banks, has been talking to regulators extensively about the changes.

First, banks will not have to report debt discharged in bankruptcy, according to Ms. Riedlinger. That condition never made sense, she said, because forgiven debt is not taxable for bankrupt customers.

"Why should banks be tracking someone's bankruptcy?" she said.

Ms. Riedlinger also expects banks will have to report only principal, not additional costs such as late charges and other penalties. That's a victory, she said, because while banks carefully track principal, they do not track fees separately, and such information is difficult to obtain.

Banks strongly opposed the December 1993 proposal because the paperwork is time-consuming. But banks' biggest gripe is that they don't want to waive their rights to collecting those debts.

"The problem is that banks don't think of themselves as ever forgiving debt," said Ms. Riedlinger.

Even though the two changes being made by the IRS will cut the burden, Ms. Riedlinger said the rules still won't be popular with the banking industry.

"Not everybody will be happy," admitted Michael Schmit, an IRS lawyer. But, he said, all of the issues brought up in the 300 comments will be addressed in the final rule.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.