Bankers Seek Guidance, Reporting Compliance Relief Due to COVID-19

1. Debtor Reporting Under the PPP

Section 1102 of the CARES Act establishes 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 cards, etc.).

Although these seem to be exceptional circumstances, our members are concerned that absent guidance providing for an exception from reporting, they will 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 will 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.

We note that Section 20234 of the Health and Economic Recovery Omnibus Emergency Solutions (HEROES) Act (H.R. 6800) includes specific authority for Treasury to waive information reporting requirements that would otherwise apply.

2. Deadlines Related to IRA and Coverdell ESA Contribution Reporting

We previously submitted a joint letter dated April 22, 2020 with the Securities Industry and Financial Markets Association (SIFMA). This letter requested clarifications and a delay in filing dates with respect to Form 5498 and related forms². We believe the current July 15, 2020, filing deadline will not permit accurate reporting, because taxpayers can make 2019 IRA contributions up to and including July 15^th. We urge that the 2019 Form 5498 filing due date be extended to at least August 31, 2020. Similar concerns apply to Form 5498-ESA (Coverdell ESA Contribution Information), since the deadline for taxpayers to make 2019 contributions to Coverdell education savings accounts was also postponed until July 15, 2020, the same date as the current 2019 Form 5498-ESA filing deadline.

In addition, we have received feedback that members, in the absence of guidance to date, have made system and process changes to report post-April 15^th IRA contributions as postponed federal disaster payment contributions on the 2020 Form 5498. We ask that the guidance also acknowledge this alternative reporting method as acceptable, and that no penalties accrue where this interpretation is implemented. We also ask that the IRS confirm that custodians and trustees are allowed to report all 2019 contributions made through July 15, 2020, on the 2019 Form 5498, and not require contributions made between April 15 and July 15, 2020, to be reported as “late contributions” on the 2020 Form 5498.

Further, a number of questions have arisen with respect to retirement-related provisions in the CARES Act, specifically section 2202 (allowing COVID-19 related distributions) and section 2203 (waiving required minimum distributions for 2020). Some of these questions may be addressed in the retirement-related provisions of the HEROES Act now being considered in Congress. Nonetheless, we urge the IRS to provide guidance on the following matters to financial institutions offering retirement accounts to the public:

• Guidance providing an extended period for IRA owners to roll over distributions taken in calendar year 2020 back into their IRA accounts, in order to take advantage of the waiver of required minimum distributions (RMDs) in the CARES Act. The IRS provided similar guidance in Notice 2009-82.

• Guidance on how to complete the RMD-related fields on Form 5498 for RMDs that are waived under the CARES Act and relief from potential penalties for incorrect RMD reporting on Form 5498.

3. Reporting for Capitalized Interest

The long-delayed project on information reporting for capitalized interest currently on the Treasury Priority Guidance plan should be restarted and completed. In light of the forbearance and related payment modifications detailed in the CARES Act and what could be a significant economic downturn underway, the uncertainties in this area should be addressed immediately. This will allow financial institutions to make any required system and process changes based on new guidance.

In previous discussions between the IRS and industry representatives, we believe we had identified a mutually agreeable approach to address both past history and a prospective path forward. We are hopeful that by re-engaging now, we can bring the project to closure. Within the Priority Guidance plan, this would include guidance under Internal Revenue Code (IRC) §§446, 1275, and 6050H to address the treatment and reporting of capitalized interest on modified home mortgages.

4. Deductions for Bad Debts

The long-delayed project on updating the regulations for bad debts should be restarted and completed. In light of what could be a potential significant economic downturn underway and implementation of the CECL accounting standard, this is a natural and important opportunity to update guidance with respect to bad debts. In addition, as you may recall, the Large Business and International (LB&I) “Bad Debt Directive” was supposed to be available only for taxable years ending before 2015.

As we go into a period of potentially significant charge-offs and losses, clear statutory and procedural guidance will benefit taxpayers, the IRS and lenders. Within the Priority Guidance plan, this would include guidance under IRC §166 on the conclusive presumption of worthlessness for bad debts. Notice 2013-35, which requested comments on the existing rules, was published on June 10, 2013.

5. Reporting Compliance Relief due to COVID-19

We offer our support and agreement on issues and recommendations included in SIFMA's letter dated March 25, 2020 related to information reporting deadlines and other operational relief. In addition, ABA has joined with other international trade associations in a letter dated April 20, 2020 with recommendations to the Organization for Economic Co-operation and Development (OECD) and the European Commission. We are appreciative that several recommendations have already been implemented. We would like to respectfully emphasize a few additional items:

• The strong need for delays in filing due dates, and flexibility on the timing, format, manner of execution and content of various types of documentation required to be obtained for domestic and international compliance.

• During the federal government shut-down of 2018-2019, computer-generated notices continued to be sent to taxpayers without the availability of IRS personnel to respond or otherwise provide information to taxpayers. In our current circumstances, we have the additional challenge that taxpayers are away from their offices and might not be in a position to acknowledge or respond to such notices. If not already implemented, we ask that computer-generated notices and the due dates of all required responses be suspended until further notice. In addition, there should be a “no penalty assessment” period until normal operations can resume for IRS staff and taxpayers, and response backlogs are cleared.

• We strongly support the acceptance of electronic signatures on required tax documentation. We appreciate changes made with respect to certain documentation included in widely reported internal guidance at the IRS. We hope that non-system–generated, electronically signed Forms W-9 will be made part of normal procedures.

• As the pandemic crisis subsides, we hope you will agree there is a common goal of providing reasonable relief from any penalties and interest assessments for compliance shortfalls that may have occurred during this very difficult period.