CREFC Investor Reporting Package
IX. CREFC IRP Best Practices
1099 Tax Reporting Best Practices
OVERVIEW
Market conditions impact the volume of IRS information reporting by Servicers in regards to Form 1099 A (Acquisition or Abandonment of Secured Property) and Form 1099 C (Cancellation of Debt). Accordingly, the level of communication required among Servicers to ensure filings with both the related borrower and IRS are completed in a timely and accurate manner is impacted
IRS reporting requirements and servicing agreements require Servicers to report to both the IRS and borrowers transactions in settlement of loans as required under the Internal Revenue Code and related publications and regulations. Specific to this best practice is reporting and communication between the Special Servicer and Master Servicer related to transactions reported for cancellation of debt (“COD”) and gain on sale requiring the Servicer to prepare Form 1099 A or Form 1099 C. Given the complexity of some workouts and foreclosures, Servicers should understand the basic concepts necessary to determine the need to file Form 1099 A or Form 1099 C. To facilitate consistent tax reporting and provide guidance to Servicers regarding 1099 A and 1099 C tax reporting, please refer to the 1099 Tax Reporting Reference Sheet and Frequently Asked Questions (see Exhibit F). Servicers may, however, need to consult with internal or external experts on tax reporting to determine the appropriate filing.
Although the IRS typically publishes Forms and Instruction for Forms before the calendar year end, the IRS can and does make updates to both forms and instructions as necessary throughout the year. Therefore, it is imperative that both Master Servicer and Special Servicer periodically check the IRS website for updates and revisions prior to year end.
GLOBAL BEST PRACTICES
Ongoing CREFC IRP 1099 subcommittee participation will be integral to the success and timing of the completion of the steps related to this best practice. The subcommittee chair and CREFC staff will maintain and periodically update a list of contacts related to tax reporting for both Master Servicers and Special Servicers (see Exhibit A, Contact List for 1099 and other Tax Reporting).
Responsibility for Preparation and Delivery of 1099 As and 1099 Cs
The Master Servicer and Special Servicer may share information and reports identifying which party is responsible for preparing and delivering the 1099s to the IRS and the borrower. This effort should be implemented as needed to avoid duplication of efforts by the Master Servicer and Special Servicer.
Pre and Post Year End Process
Based on the fluid nature of the requirements surrounding the completion of Form 1099 A and Form 1099 C, specific best practices are as follows:
Pre-year End Process
On or about August 31st of each year, the CREFC IRP 1099 subcommittee will review the IRS requirements for the upcoming tax season in order to update the standard template workbook. This workbook (or updated workbook to accommodate changes to the IRS publications and regulations) will be utilized for delivery of data from the Special Servicer to the Master Servicer (see Exhibit E example, two tabs, 1099 A and 1099 C).
This preliminary year end workbook template can be used to communicate 1099 A and 1099 C activity between Servicers before year end. It is recommended that Master Servicers provide information (representing the population of assets requiring 1099 As and Cs) to the Special Servicer on or about October 15th of each year for the period ending September 30th. The Special Servicers should provide feedback on the accuracy of the data provided by the Master Servicer on or about November 15th. (See Exhibit B, Pre-Year End 1099 A and C Data Scrub; Exhibit C, 1099 A Pre Year End Example; and Exhibit D, 1099 C Pre Year End Example)
Year End Process
The CREFC IRP 1099 subcommittee will re-review the IRS requirements immediately prior to year end in order to modify, as needed, and finalize the standard template workbook. As necessary to reflect revisions as a result of IRS publications and regulations in addition to agreed subcommittee revisions, the final standard template workbook for such year end tax reporting will be distributed to the parties (See Exhibit A) no later than the end of the first week in January.
As possible, the Special Servicer should complete and submit the final 1099 A and 1099 C standard template workbook to the Master Servicer on or before January 20th or the preceding business day.
Standard Template Workbook (Exhibit E)
The template reflects the following:
· Column headers reflecting the file layout sent by the Special Servicer to the Master Servicer with corresponding information required on Form 1099 A and 1099 C.
· Field completion responsibility as follows:
o SS to complete
o MS to complete
o SS to complete but may consider certain exceptions as explained on the template.
· Discussion Points and Notes
o Provides a brief explanation to support the completion responsibility as determined by the subcommittee.
· Sample file sent by the Special Servicer to Master Servicer.
Specific instructions for completion of the standard template workbook are as follows:
· Prepared in Excel
· Not be altered in regards to the order of the fields
· In regards to dates, amounts, fields with hyphens, the Master Servicers are able to accept data without specific reformatting by the Special Servicer.
Additional Other Best Practices
Servicing Transfers
The Special Servicer assigned to an asset at the time of a 1099 A or 1099 C transaction event should either prepare the IRS filing or provide the required information to the Master Servicer, depending on the servicing agreement. It is understood that the “new or incoming” Special Servicer may not have access to all the required transaction information to prepare the required filing.
Sensitive Information
Servicers must be sensitive to including personal identifiable information for individual borrowers while transmitting information especially as may be included in the pre-year end and year end standard template workbook. For example, the Servicer should consider sending information in the standard template workbook for individual borrowers without the tax identification numbers.
Other IRS Forms
Form 1098, Form 1099 INT and Form 1099 MISC should be sent to the appropriate parties (i.e. borrower, vendor, etc.) by the Master Servicer. As needed, the Special Servicer should assist in providing information to the Master Servicer to facilitate the timely delivery of these forms to the appropriate party before January 31st.