RE: Notice 2020-47; Recommendations for 2020-2021 Priority Guidance Plan
Internal Revenue Service
Attn: CC:PA:LPD:PR (Notice 2020-47) Room 5203
P.O. Box 7604
Ben Franklin Station
Washington, D.C. 20044
Dear Sir or Madam:
On behalf of its members, the American Bankers Association (ABA)1 is pleased to submit the following recommendations for items that should be included on the 2020-2021 Priority Guidance Plan. We applaud the efforts of the Internal Revenue Service and Treasury in issuing significant guidance related to pandemic challenges and legislation. We have one new suggestion for the upcoming plan and maintain the recommendations below for issues that are already within the current Plan.
Section 1102 of the CARES Act established the Paycheck Protection Program (PPP). This program facilitates loans to qualified businesses to fund wages and other qualified expenses. If a participant in the PPP meets certain requirements, all or part of their loan may be forgiven. Section 1106 then provides that any amount which would be includible in gross income of the eligible recipient by reason of forgiveness shall be excluded from taxable income.
With this in mind, Internal Revenue Code Section 6050P and the regulations thereunder require that any applicable entity that discharges an indebtedness of any person of at least $600 during a calendar year must file an information return on Form 1099-C, Cancellation of Debt, with the IRS. The regulations further require that upon an “identifiable event”, discharged indebtedness must be reported on Form 1099-C, regardless of whether the debtor is subject to tax on the discharged debt under Sections 61 and 108 or otherwise by applicable law. Our member firms have developed extensive processes and systems to timely capture the information that needs to be reported for various types of debt forgiveness (e.g., loans, credit
Although these seem to be exceptional circumstances, our members are concerned that absent guidance providing for an exception from reporting, they may be required to report on Form 1099-C any amounts that are forgiven in situations where a debtor meets the requirements of the CARES Act to have their PPP indebtedness forgiven.
We understand that the IRS may provide instructions and related forms that will direct a taxpayer to report and then exclude the income on their tax return for the year of forgiveness. That said, we believe requiring this income to be reported on Form 1099-C will generate significant confusion and concern among the taxpayers that the CARES Act was designed to help. We believe these concerns will occur even if the reporting institutions provide extensive background information to those taxpayers along with their Forms 1099-C.
If the policy objectives of the PPP are achieved, there will be large amounts of potentially reportable debt forgiveness income. Given the newness and uniqueness of the PPP, member firms cannot rely on existing processes and systems to capture PPP debt forgiveness. If Form 1099-C reporting is required, lenders will be required to set up new systems and processes to capture the required information for reporting. Our members are now in the process of dimensioning the required changes and additions to systems and processes if this potential reporting requirement is not changed. It is likely that, at best, member firms may need to put in place manual processes to capture this information. Given that employees at most firms are working from home, it will be difficult to implement new manual processes to capture this information, particularly by year-end. Given the confusion we foresee among taxpayers and the difficulty to implement new processes, we recommend that guidance be issued indicating that, due to the nature of the PPP program, PPP related debt forgiveness income is not reportable.
The following issues are included on the current Priority Guidance Plan. As noted above, we applaud your focus on getting out much needed pandemic related guidance. Given the number of potentially affected taxpayers and administrative challenges, we also appreciate your attention to these issues and to the need for uniform guidance. Accordingly, we recommend that IRS and Treasury keep these issues on the Plan due to their importance to the banking industry and hope that guidance will be forthcoming shortly.
1. There is ambiguity and lack of guidance regarding the information reporting requirements for interest paid in cases where accrued, but unpaid mortgage interest is included in a modified mortgage loan. In addition, most believe that there will likely be a significant increase in the level of modified loans due to the economic issues caused by the pandemic. We believe that the IRS and Treasury are uniquely situated to address the issues in a way that is consistent with the law and the best interests of tax administration, including both the best interests of taxpayers and the IRS through proper tax compliance. To address this lack of guidance, the ABA recommends that the guidance ultimately should, at a minimum:
a. Provide that payments are attributable first to interest that has accrued under the terms of a modified mortgage , second to interest on the pre-modification mortgage that was added to principal at the time of modification, and finally to principal that is not attributable to pre-modification interest.
b. Reporting entities must then allocate payments received on a modified mortgage to interest as described.
c. Be prospective – that is, effective for mortgages modified after issuance of final regulations. To the extent a borrower on a mortgage that was modified prior to the effective date did not deduct the post-modification payments of pre-modification interest that he or she would otherwise be entitled to deduct under the requested guidance, the guidance should permit the borrower to deduct such amount in her/his next filed return via a simplified change in method of accounting process.
2. In connection with addressing a variety of issues related to the timing of deducting bad debts and the current rules related to the book / tax conformity election, Treasury initiated a project to review and potentially update the regulations in this area. Notice 2013-35, which requested comments on the existing rules, was published on June 10, 2013:
a. Although there appears to be less controversy on this issue than in the past, this continues to be an important issue for banks. An examination directive (LB&I-04- 1014-008) regarding these issues applied only for taxable years 2010-2014 and accordingly, updated guidance is necessary. In addition, most believe that there will likely be a significant increase in the level of bad debts due to the economic issues caused by the pandemic.
b. A new financial accounting standard (Accounting Standards Update 2016-13, popularly known as “CECL”) has been promulgated for loan loss reserves. With the implementation of the standard required for public companies beginning in 2020, it is a relevant time to review the book and tax issues surrounding bad debts.
c. We ask that Treasury re-open this project and update the regulations as appropriate.
d. For additional background, please see our joint trades comment letter submitted on October 8, 2013.
3. ABA urges the IRS to issue finarules on consistent basis reporting of an estate’s assets and make necessary changes to Form 8971, in keeping with our June 1, 2016 comments. In particular, the final rule should:
a. Eliminate unnecessary filings of Form 8971,
b. Except certain property from the reporting requirements,
c. Withdraw the negative treatment of after-discovered or omitted property, and
d. Withdraw the reporting requirement for subsequent transfers of reported property.
In addition, we request that the IRS amend the instructions to Form 8971 not to impose penalties for incomplete information on beneficiaries. For example, situations may arise in which an estate makes a distribution to a beneficiary that has no Taxpayer Identification Number.
We appreciate the efforts of the IRS and Department of the Treasury to address these important issues. Please do not hesitate to contact us with any questions. For questions regarding the trust, estate and gift tax matters raised in this letter, please reach out to Phoebe Papageorgiou at (202) 663-5053.
John P. Kinsella