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Taxslayer com login Internal Revenue Bulletin:  2013-7  February 11, 2013  Rev. Taxslayer com login Proc. Taxslayer com login 2013-16 Table of Contents SECTION 1. Taxslayer com login PURPOSE SECTION 2. Taxslayer com login BACKGROUND—HAMP AND THE HAMP PRINCIPAL REDUCTION ALTERNATIVE SECTION 3. Taxslayer com login BACKGROUND—APPLICABLE PROVISIONS OF LAW SECTION 4. Taxslayer com login FEDERAL INCOME TAX TREATMENT SECTION 5. Taxslayer com login INFORMATION-REPORTING OBLIGATIONS SECTION 6. Taxslayer com login HAMP-PRA BORROWERS’ REPORTING OF DISCHARGES OF INDEBTEDNESS UNDER HAMP-PRA SECTION 7. Taxslayer com login PENALTY RELIEF FOR 2012 SECTION 8. Taxslayer com login SCOPE AND EFFECTIVE DATE SECTION 9. Taxslayer com login DRAFTING INFORMATION SECTION 1. Taxslayer com login PURPOSE This revenue procedure provides guidance to mortgage loan holders, loan servicers, and borrowers who are participating in the Department of the Treasury’s (Treasury) and Department of Housing and Urban Development’s (HUD) Home Affordable Modification Program® (HAMP®). Taxslayer com login Under HAMP, a borrower may be eligible for principal reduction of the outstanding balance of a qualifying mortgage pursuant to the program’s Principal Reduction AlternativeSM (PRA). Taxslayer com login In appropriate cases, HAMP has been offering the PRA as part of a HAMP loan modification since the last quarter of 2010. Taxslayer com login Current plans call for HAMP to continue accepting new borrowers through the end of 2013. Taxslayer com login The Internal Revenue Service (Service) is providing this guidance to address the tax consequences for borrowers (HAMP-PRA borrowers) who are participating in the PRA and the reporting obligations for participating mortgage loan holders and servicers. Taxslayer com login SECTION 2. Taxslayer com login BACKGROUND—HAMP AND THE HAMP PRINCIPAL REDUCTION ALTERNATIVE . Taxslayer com login 01 To help distressed borrowers lower their monthly mortgage payments, Treasury and HUD established HAMP for mortgage loans that are not owned or guaranteed by the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac). Taxslayer com login A description of the program can be found at www. Taxslayer com login makinghomeaffordable. Taxslayer com login gov. Taxslayer com login . Taxslayer com login 02 Under HAMP, a participating loan servicer, acting on behalf of the mortgage loan holder, must consider a sequence of modification steps for each eligible borrower’s mortgage loan until the borrower’s monthly payment is reduced to a monthly payment amount determined under the HAMP guidelines. Taxslayer com login These steps include a reduction in the mortgage loan’s interest rate, an extension of the mortgage loan’s term, and a reduction in the mortgage loan’s principal balance. Taxslayer com login . Taxslayer com login 03 In some cases, the unpaid principal balance of the modified mortgage loan is divided into (1) an amount that bears stated interest and that is used to calculate the borrower’s new monthly mortgage payment (the “Non-forbearance Portion”), and (2) a forbearance amount, which does not bear stated interest and on which periodic payments of stated principal are not required. Taxslayer com login The stated principal of the forbearance amount is due upon the earliest of the borrower’s transfer of the property, payoff of the balance on the Non-forbearance Portion of the mortgage loan, or maturity of the mortgage loan. Taxslayer com login However, as noted in section 2. Taxslayer com login 06 of this revenue procedure, a HAMP-PRA borrower sometimes may not have to pay all or a portion of the forbearance amount. Taxslayer com login (The forbearance amount associated with a HAMP-PRA principal reduction is called the “PRA Forbearance Amount. Taxslayer com login ”) . Taxslayer com login 04 If a mortgage loan is being considered for a HAMP modification and the amount owed on the mortgage loan is greater than 115 percent of the value of the property, then the servicer must consider whether principal reduction under PRA should be used as part of the HAMP modification. Taxslayer com login . Taxslayer com login 05 The first step toward a HAMP modification is a trial period plan, in which the borrower’s monthly mortgage payment is set at a monthly payment amount determined under the HAMP guidelines. Taxslayer com login The trial period plan effective date is the due date for the first of the reduced payments that are to be made under the trial period plan. Taxslayer com login (It is the first day of either the first or the second month after the servicer transmits the trial period notice to the borrower. Taxslayer com login ) In general, the trial period is three months, and, during this period, the borrower must satisfy certain conditions before the changes to the terms of the mortgage loan become permanent (the “Trial Period Conditions”). Taxslayer com login Specifically, depending on the borrower’s trial period payment history, the borrower’s compliance with HAMP and servicer guidelines, and his or her satisfaction of all other Trial Period Conditions, the borrower will be offered a permanent modification of the terms of the mortgage loan, including monthly mortgage payments that are lower than those under the old mortgage loan. Taxslayer com login Until the effective date of a permanent modification, the terms of the existing mortgage loan continue to apply. Taxslayer com login . Taxslayer com login 06 After the mortgage loan is permanently modified under HAMP, if the modified mortgage loan is in good standing on the first, second, or third annual anniversary of the trial period plan effective date (the “Three-year Period”), the servicer must reduce the unpaid principal balance of the mortgage loan on the respective anniversary date by one-third of the initial PRA Forbearance Amount. Taxslayer com login (The servicer allocates the entire reduction to the remaining PRA Forbearance Amount. Taxslayer com login ) In general, if a HAMP-PRA borrower’s mortgage loan is in good standing and if the HAMP-PRA borrower pays in full the Non-forbearance Portion of the mortgage loan prior to the reduction of the entire PRA Forbearance Amount, the servicer must reduce the remaining outstanding principal balance of the mortgage loan by the remaining PRA Forbearance Amount. Taxslayer com login . Taxslayer com login 07 In connection with every HAMP loan modification, the HAMP program administrator (acting on behalf of the federal government) provides incentives to the borrower, the servicer, and the investor (that is, the holder of the mortgage loan). Taxslayer com login If a HAMP loan modification includes a PRA principal reduction, the HAMP program administrator makes additional incentive payments to the investor. Taxslayer com login These additional incentives are called “PRA Investor Incentive Payments” and are generally spread over three years. Taxslayer com login The size of the PRA Investor Incentive Payments depends on the amount of principal reduced, the loan-to-value ratio at the time of the HAMP modification, and the loan’s payment history before the modification. Taxslayer com login The PRA Investor Incentive Payments range from 18 to 63 percent of the principal amounts reduced. Taxslayer com login For purposes of this revenue procedure, the excess of the initial PRA Forbearance Amount of a mortgage loan over the aggregate PRA Investor Incentive Payments scheduled to be paid with respect to that loan is called the “PRA Adjusted Forbearance Amount. Taxslayer com login ” . Taxslayer com login 08 A PRA Investor Incentive Payment is earned by the investor on each date on which the servicer reduces the unpaid principal balance of the mortgage loan by a portion of the PRA Forbearance Amount (generally, on the first three annual anniversaries of the trial period plan effective date). Taxslayer com login . Taxslayer com login 09 If a HAMP-PRA borrower’s early payment in full of the Non-forbearance Portion of the mortgage loan accelerates the reduction of the remaining PRA Forbearance Amount (described above in section 2. Taxslayer com login 06 of this revenue procedure), the remaining PRA Investor Incentive Payments from the HAMP program administrator are also accelerated. Taxslayer com login . Taxslayer com login 10 If, prior to completion of the Three-year Period, a mortgage loan ceases to be in good standing because of the HAMP-PRA borrower’s payment history, then the remaining PRA Forbearance Amount is not further reduced and is due when the HAMP-PRA borrower transfers the property, the HAMP-PRA borrower refinances, or otherwise pays off the Non-forbearance Portion of the mortgage loan, or the mortgage loan matures. Taxslayer com login SECTION 3. Taxslayer com login BACKGROUND—APPLICABLE PROVISIONS OF LAW . Taxslayer com login 01 Under § 61 of the Internal Revenue Code, except as otherwise provided in subtitle A, gross income means all income from whatever source derived, including income from discharge of indebtedness. Taxslayer com login See § 61(a)(12). Taxslayer com login . Taxslayer com login 02 Under § 1. Taxslayer com login 1001-3 of the Income Tax Regulations, if a debt instrument undergoes a significant modification, then the modification results in an exchange of the original debt instrument for the modified debt instrument. Taxslayer com login In general, an agreement to change a term of a debt instrument is a modification at the time the borrower and holder enter into the agreement, even if the change in term is not immediately effective. Taxslayer com login However, if the change is conditioned on reasonable closing conditions, a modification occurs on the closing date of the agreement. Taxslayer com login See § 1. Taxslayer com login 1001-3(c)(6). Taxslayer com login . Taxslayer com login 03 Under § 108(e)(10), in the case of a debt-for-debt exchange (including a deemed exchange under § 1. Taxslayer com login 1001-3), the borrower is treated as having satisfied the original debt instrument with an amount of money equal to the issue price of the new debt instrument. Taxslayer com login If the amount of debt satisfied in this manner exceeds that issue price, the borrower realizes discharge of indebtedness income on the exchange. Taxslayer com login See also § 1. Taxslayer com login 61-12(c). Taxslayer com login . Taxslayer com login 04 The issue price of a non-publicly traded debt instrument issued for non-publicly traded property generally reflects the amount of principal that the borrower is required to pay to the holder of the instrument. Taxslayer com login If a borrower has the ability to avoid paying certain amounts (including principal) without violating the terms of the instrument, the payment schedule for the instrument is generally determined based on an assumption that the borrower will avoid any requirement to make those payments. Taxslayer com login See, e. Taxslayer com login g. Taxslayer com login , §§ 1. Taxslayer com login 1272-1(c)(5) and 1. Taxslayer com login 1274-2(d). Taxslayer com login . Taxslayer com login 05 Under § 108(a), gross income does not include any amount that but for § 108(a) would be includible in gross income by reason of the discharge (in whole or in part) of a taxpayer’s indebtedness if (1) the indebtedness discharged is qualified principal residence indebtedness that is discharged before January 1, 2014, or (2) the discharge occurs when the taxpayer is insolvent. Taxslayer com login Section 108(a)(1)(E) and 108(a)(1)(B). Taxslayer com login (Although § 108 contains other exclusions as well, this revenue procedure focuses on these two exclusions because they are the most likely to apply to the greatest number of HAMP-PRA borrowers. Taxslayer com login ) . Taxslayer com login 06 Under §§ 108(h) and 163(h)(3)(B), qualified principal residence indebtedness is any indebtedness that is incurred by a borrower to buy, build, or substantially improve the borrower’s principal residence and is secured by that residence. Taxslayer com login . Taxslayer com login 07 Qualified principal residence indebtedness also includes a loan secured by the borrower’s principal residence that refinances qualified principal residence indebtedness, but only to the extent of the amount of the refinanced indebtedness. Taxslayer com login See §§ 108(h) and 163(h)(3)(B)(i). Taxslayer com login . Taxslayer com login 08 The maximum amount of discharged indebtedness that a borrower may exclude from gross income under the qualified principal residence indebtedness exclusion is $2,000,000 ($1,000,000 for a married individual filing a separate return). Taxslayer com login Under § 108(h)(4), if only part of the discharged indebtedness is qualified principal residence indebtedness, then the exclusion applies only to the amount of the discharged indebtedness that exceeds the amount of the loan (determined immediately before the discharge) that is not qualified principal residence indebtedness. Taxslayer com login . Taxslayer com login 09 Under § 108(a)(3), the insolvency exclusion applies to the lesser of the amount of the debt discharged or the amount by which the taxpayer is insolvent immediately before the discharge. Taxslayer com login . Taxslayer com login 10 Section 108(d)(3) provides that, for purposes of the insolvency exclusion, a taxpayer is insolvent to the extent that the taxpayer’s total liabilities exceed the fair market value of all of the taxpayer’s assets immediately before the discharge of indebtedness. Taxslayer com login Under § 108(a)(2)(C), the qualified principal residence indebtedness exclusion takes precedence over the insolvency exclusion when both exclusions apply to discharged indebtedness, unless the taxpayer elects to apply the insolvency exclusion. Taxslayer com login . Taxslayer com login 11 If an amount is excluded from gross income as a discharge of qualified principal residence indebtedness, the taxpayer must reduce the basis of the taxpayer’s principal residence. Taxslayer com login See § 108(h)(1). Taxslayer com login If a discharged amount is excluded from gross income because the taxpayer was insolvent when the discharge occurred, the taxpayer must reduce certain tax attributes (possibly including basis). Taxslayer com login See § 108(b). Taxslayer com login For further discussion of income from the discharge of indebtedness, the qualified principal residence indebtedness exclusion, the insolvency exclusion, and other exclusions from gross income that may apply, see Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments (for Individuals). Taxslayer com login . Taxslayer com login 12 Taxpayers who exclude any discharged amounts from gross income report both the exclusion and the resulting reduction in basis or other tax attributes on Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment). Taxslayer com login See Form 982 instructions and Publication 4681. Taxslayer com login This form is to be filed with the tax return for the taxable year in which the amount is discharged but is excluded from gross income. Taxslayer com login . Taxslayer com login 13 Governmental payments made to or on behalf of individuals or other persons are included within the broad definition of gross income under § 61 unless an exception applies. Taxslayer com login See Notice 2003-18, 2003-1 C. Taxslayer com login B. Taxslayer com login 699, and Rev. Taxslayer com login Rul. Taxslayer com login 79-356, 1979-2 C. Taxslayer com login B. Taxslayer com login 28. Taxslayer com login However, if disbursements are made by a governmental unit to individuals in the interest of the general welfare (that is, are generally based on individual or family need) and the disbursements do not represent compensation for services, then the amounts disbursed are excluded from the income of the recipient (general welfare exclusion). Taxslayer com login See Rev. Taxslayer com login Rul. Taxslayer com login 2005-46, 2005-2 C. Taxslayer com login B. Taxslayer com login 120, and Rev. Taxslayer com login Rul. Taxslayer com login 75-246, 1975-1 C. Taxslayer com login B. Taxslayer com login 24. Taxslayer com login . Taxslayer com login 14 Under § 451 and § 1. Taxslayer com login 451-1(a), a taxpayer that uses the cash receipts and disbursements method of accounting includes income in gross income when the taxpayer actually or constructively receives the income. Taxslayer com login . Taxslayer com login 15 Section 6041 requires every person engaged in a trade or business (including the United States and its agencies) to (1) file an information return (Form 1099-MISC, Miscellaneous Income, is used for this purpose) for each calendar year in which the person makes, in the course of its trade or business, payments to another person of fixed or determinable income aggregating $600 or more, and (2) furnish a copy of the information return to that other person. Taxslayer com login See § 6041(a) and (d) and § 1. Taxslayer com login 6041-1(a)(1) and (b). Taxslayer com login . Taxslayer com login 16 Section 6050P requires applicable entities (including the United States and its agencies, financial entities, and any organization a significant trade or business of which is the lending of money) to (1) file an information return (Form 1099-C, Cancellation of Debt, is used for this purpose) for each calendar year in which it discharges indebtedness of another person of $600 or more, and (2) furnish a copy of the information return to that other person. Taxslayer com login See § 6050P(a)-(c) and §§ 1. Taxslayer com login 6050P-1(a) and 1. Taxslayer com login 6050P-2(a) and (d). Taxslayer com login . Taxslayer com login 17 Section 6721 imposes penalties with respect to information returns required to be filed with the Service. Taxslayer com login These penalties apply in the case of a failure to timely file an information return, a failure to include all required information on the return, or the inclusion of incorrect information on the return. Taxslayer com login Section 6724(d)(1) includes Forms 1099-MISC and 1099-C in the term “information return. Taxslayer com login ” . Taxslayer com login 18 Section 6722 imposes penalties with respect to payee statements required to be furnished to payees. Taxslayer com login These penalties apply in the case of a failure to timely furnish a payee statement, a failure to include all required information on the statement, or the inclusion of incorrect information on the payee statement. Taxslayer com login Section 6724(d)(2) includes in the term “payee statement” copies of Forms 1099-MISC and 1099-C that are required to be furnished to taxpayers. Taxslayer com login SECTION 4. Taxslayer com login FEDERAL INCOME TAX TREATMENT . Taxslayer com login 01 Because a HAMP modification with a PRA principal reduction is a significant modification, it results in a deemed debt-for-debt exchange in which the HAMP-PRA borrower satisfies the old mortgage loan by issuing a new one. Taxslayer com login See § 1. Taxslayer com login 1001-3. Taxslayer com login At the time of the modification, therefore, under § 108 and this revenue procedure, the HAMP-PRA borrower realizes discharge of indebtedness income equal to any excess of the adjusted issue price of the old mortgage loan (which was satisfied in the deemed exchange) over the issue price of the new (post-modification) mortgage loan. Taxslayer com login See also § 61(a)(12) and § 1. Taxslayer com login 61-12(c). Taxslayer com login . Taxslayer com login 02 A HAMP-PRA borrower has the ability to avoid payment of the PRA Adjusted Forbearance Amount. Taxslayer com login Because the HAMP-PRA borrower has this ability, that amount should not be taken into account in determining the issue price of the new mortgage loan. Taxslayer com login Because the issue price of the new mortgage loan does not include the PRA Adjusted Forbearance Amount, the PRA Adjusted Forbearance Amount contributes to the excess of the adjusted issue price of the old mortgage loan (which was satisfied in the deemed exchange) over the issue price of the new mortgage loan. Taxslayer com login . Taxslayer com login 03 On the other hand, the investor has not given up its right to receive the remainder of the PRA Forbearance Amount, because the HAMP program administrator is expected to make those payments on the HAMP-PRA borrower’s behalf by making the PRA Investor Incentive Payments. Taxslayer com login Because the remainder of the PRA Forbearance Amount is payable in this manner, that remainder is included in the issue price of the new mortgage loan. Taxslayer com login . Taxslayer com login 04 The Trial Period Conditions are reasonable closing conditions that must be satisfied before the changes to the terms of the mortgage loan become permanent. Taxslayer com login Therefore, for purposes of § 1. Taxslayer com login 1001-3, the date of the modification is the date of the permanent modification. Taxslayer com login . Taxslayer com login 05 Unless an exclusion applies, the HAMP-PRA borrower includes in gross income the discharge of indebtedness income described in section 4. Taxslayer com login 01 of this revenue procedure for the taxable year in which the permanent modification occurs. Taxslayer com login Under certain conditions, however, section 6 of this revenue procedure permits a borrower to report the discharge of indebtedness under HAMP-PRA over the Three-year Period. Taxslayer com login The qualified principal residence indebtedness exclusion under § 108(a)(1)(E) and the insolvency exclusion under § 108(a)(1)(B) are two exclusions that may apply to the discharge. Taxslayer com login . Taxslayer com login 06 The PRA Investor Incentive Payment is treated as a payment on the mortgage loan by the HAMP program administrator on behalf of the HAMP-PRA borrower. Taxslayer com login . Taxslayer com login 07 To the extent that the HAMP-PRA borrower uses the property as the HAMP-PRA borrower’s principal residence or the property is occupied by the HAMP-PRA borrower’s legal dependent, parent, or grandparent without rent being charged or collected, the HAMP-PRA borrower excludes from his or her gross income under the general welfare exclusion the PRA Investor Incentive Payments that the HAMP program administrator makes to the investor in the mortgage loan. Taxslayer com login This is consistent with Rev. Taxslayer com login Rul. Taxslayer com login 2009-19, 2009-28 I. Taxslayer com login R. Taxslayer com login B. Taxslayer com login 111, which addressed the treatment of Pay-for-Performance Success Payments. Taxslayer com login . Taxslayer com login 08 To the extent that the HAMP-PRA borrower uses the property as a rental property or holds the property vacant and available for rent, the HAMP-PRA borrower includes PRA Investor Incentive Payments in gross income. Taxslayer com login If the HAMP-PRA borrower uses the cash receipts and disbursements method of accounting, then the HAMP-PRA borrower includes a PRA Investor Incentive Payment in gross income in the taxable year in which it is applied as a payment on the HAMP-PRA borrower’s mortgage loan. Taxslayer com login . Taxslayer com login 09 As described in section 2. Taxslayer com login 09 of this revenue procedure, if a HAMP-PRA borrower pays in full the Non-forbearance Portion of the mortgage loan while the loan is in good standing and prior to completion of the Three-year Period, that payment accelerates both the reduction in the remaining PRA Forbearance Amount and the PRA Investor Incentive Payments from the HAMP program administrator. Taxslayer com login To the extent that the HAMP-PRA borrower is described in section 4. Taxslayer com login 07 of this revenue procedure, the HAMP-PRA borrower excludes from his or her gross income under the general welfare exclusion the accelerated PRA Investor Incentive Payments. Taxslayer com login To the extent that the HAMP-PRA borrower is described in section 4. Taxslayer com login 08 of this revenue procedure, the HAMP-PRA borrower includes in income in the year of the acceleration the remaining amount of the PRA Investor Incentive Payment. Taxslayer com login SECTION 5. Taxslayer com login INFORMATION-REPORTING OBLIGATIONS . Taxslayer com login 01 Under § 6050P, the investor is required to file a Form 1099-C with respect to a borrower who realizes discharge of indebtedness of $600 or more. Taxslayer com login A copy of this form is required to be furnished to the borrower. Taxslayer com login . Taxslayer com login 02 As stated in sections 4. Taxslayer com login 01 and 4. Taxslayer com login 04 of this revenue procedure, the HAMP-PRA discharge of indebtedness is realized at the time of the permanent modification of the mortgage loan. Taxslayer com login . Taxslayer com login 03 An investor is an applicable entity that is required under § 1. Taxslayer com login 6050P-1 and this revenue procedure to issue a Form 1099-C for discharge of indebtedness. Taxslayer com login Under § 1. Taxslayer com login 6050P-1(b)(2)(F), the permanent modification of a mortgage loan is an identifiable event. Taxslayer com login Identifiable events determine when Forms 1099-C have to be issued. Taxslayer com login Thus, the Form 1099-C is issued for the calendar year in which the permanent mortgage loan modification occurs. Taxslayer com login This rule under § 1. Taxslayer com login 6050P-1(b)(2)(F) applies even if, under section 6 of this revenue procedure, the HAMP-PRA borrower chooses to treat the HAMP-PRA discharge as being realized at the times when the unpaid principal balance of the new mortgage loan is reduced. Taxslayer com login . Taxslayer com login 04 The investor (or the loan servicer acting on behalf of the investor) reports the full amount of the discharge on the Form 1099-C regardless of whether some or all of the amount is excludible from income under the qualified principal residence indebtedness exclusion, the insolvency exclusion, or any other exclusion that may apply. Taxslayer com login That discharged amount will generally be the PRA Adjusted Forbearance Amount (which does not include the amounts expected to be satisfied by PRA Investor Incentive Payments). Taxslayer com login . Taxslayer com login 05 To the extent that PRA Investor Incentive Payments are made on behalf of a HAMP-PRA borrower who is described in section 4. Taxslayer com login 07 of this revenue procedure, the PRA Investor Incentive Payments are excluded from the gross income of the HAMP-PRA borrower, and thus they are not fixed or determinable income to the HAMP-PRA borrower. Taxslayer com login Under § 6041, these payments are not subject to information reporting. Taxslayer com login See Notice 2011-14, 2011-11 I. Taxslayer com login R. Taxslayer com login B. Taxslayer com login 544, 546. Taxslayer com login . Taxslayer com login 06 To the extent that PRA Investor Incentive Payments are made on behalf of a HAMP-PRA borrower who is described in section 4. Taxslayer com login 08 of this revenue procedure, the PRA Investor Incentive Payments are includible in gross income as fixed or determinable income in the taxable year required by the HAMP-PRA borrower’s method of accounting. Taxslayer com login The payment is subject to the information reporting requirements of § 6041, as described in section 3. Taxslayer com login 15 of this revenue procedure. Taxslayer com login Accordingly, the HAMP program administrator is required to issue a Form 1099-MISC reporting the PRA Investor Incentive Payment. Taxslayer com login SECTION 6. Taxslayer com login HAMP-PRA BORROWERS’ REPORTING OF DISCHARGES OF INDEBTEDNESS UNDER HAMP-PRA . Taxslayer com login 01 In general. Taxslayer com login The HAMP-PRA program began in the last quarter of 2010, and since that time there has been uncertainty about whether the amount of the discharge of indebtedness should be reported in the year of the permanent modification or over the Three-year Period (when the unpaid principal balance on the new mortgage loan is reduced). Taxslayer com login As a result, some HAMP-PRA borrowers have been reporting the discharge of indebtedness under HAMP-PRA over the Three-year Period. Taxslayer com login Given the temporary nature of the program and the issuance of this guidance after participation in the program has begun, in the interests of equitable and sound tax administration, HAMP-PRA borrowers may report discharges of indebtedness under HAMP-PRA under the rules in this section 6. Taxslayer com login A HAMP-PRA borrower may choose to report discharges of indebtedness under HAMP-PRA pursuant to the rules in this section 6 only if the borrower applies the same borrower option under section 6. Taxslayer com login 02 of this revenue procedure consistently to the taxable year of the permanent modification and to all subsequent taxable years. Taxslayer com login Thus, a HAMP-PRA borrower may not choose a borrower option under section 6. Taxslayer com login 02 of this revenue procedure if a statute of limitations has expired for any of the taxable years that are necessary for consistent application of that option. Taxslayer com login . Taxslayer com login 02 HAMP-PRA borrower options. Taxslayer com login A HAMP-PRA borrower may treat the HAMP-PRA discharge as being realized in either of the following ways— (1) One hundred percent of the PRA Adjusted Forbearance Amount at the time of the permanent modification; or (2) One third of the PRA Adjusted Forbearance Amount on each of the first three annual anniversaries of the trial period plan effective date (described in section 2. Taxslayer com login 06 of this revenue procedure), when, as required by the terms of the new mortgage loan, the servicer reduces the unpaid principal balance of the new mortgage loan. Taxslayer com login If some or all of the reduction in the unpaid principal balance is accelerated (as described in section 2. Taxslayer com login 06 of this revenue procedure) because the HAMP-PRA borrower prepays the Non-forbearance Portion of the mortgage loan, then the HAMP-PRA discharge represented by the amount of the reduction that was accelerated is treated as being realized at the time of the accelerated reduction. Taxslayer com login . Taxslayer com login 03 HAMP-PRA borrowers who choose to realize the HAMP-PRA discharge at the time of the permanent modification. Taxslayer com login (1) If a HAMP-PRA borrower chooses to treat the HAMP-PRA discharge as being realized at the time of the permanent modification, then for the taxable year in which the permanent modification occurs, the HAMP-PRA borrower reports on Form 982 the amount, if any, of the discharge that is excluded from gross income and includes in gross income any remaining discharge. Taxslayer com login (2) If a HAMP-PRA borrower’s mortgage loan was permanently modified under HAMP in 2010 or 2011, and if the borrower was reporting the discharge of indebtedness using the method described in section 6. Taxslayer com login 02(2) of this revenue procedure, then the borrower may change to reporting the discharge of indebtedness using the method described in section 6. Taxslayer com login 02(1) of this revenue procedure by filing a 2012 Form 982 with the borrower’s timely filed (with extensions) 2012 income tax return. Taxslayer com login This section 6. Taxslayer com login 03(2) applies only if the change to reporting the discharge using the method described in section 6. Taxslayer com login 02(1) of this revenue procedure does not change the borrower’s federal income tax liability (including any change in federal income tax liability due to a change in basis or tax attributes (under § 108(h)(1) or § 108(b))) for any taxable year prior to the borrower’s 2012 taxable year. Taxslayer com login To make this change, the borrower must— (i) Compute the amount of discharge of indebtedness that would be included in income under § 61(a)(12) or excluded from gross income under § 108, basing the computation of the discharge on the facts as of the year of the permanent modification; and (ii) Report on a 2012 Form 982 the reduction in basis or tax attributes (under § 108(h)(1) or § 108(b)) due to the permanent modification that the borrower would have reported on the Form 982 for the taxable year of the permanent modification, minus any reductions due to the permanent modification that the borrower actually reported on Forms 982 for taxable years prior to 2012. Taxslayer com login (3) Example. Taxslayer com login The following example illustrates the application of section 6. Taxslayer com login 03(2) of this revenue procedure. Taxslayer com login In 2010, B’s basis in B’s principal residence was $330,000. Taxslayer com login In 2010, B’s mortgage loan on the principal residence is permanently modified under HAMP-PRA. Taxslayer com login B realized $30,000 of cancellation of indebtedness from the permanent modification, all of which qualifies for the exclusion from income for qualified principal residence indebtedness under § 108(a)(1)(E). Taxslayer com login The trial period plan effective date also fell in 2010. Taxslayer com login B’s federal income tax return for 2010 was consistent with B’s reporting this discharge of indebtedness using the method described in section 6. Taxslayer com login 02(2) of this revenue procedure. Taxslayer com login That is, B’s 2010 return did not include income from discharge of indebtedness under HAMP-PRA, nor did the return contain a Form 982 reporting exclusion of any such discharge of indebtedness. Taxslayer com login The next year, B reported on line 10(b) of the 2011 Form 982 that B filed with B’s 2011 federal income tax return a $10,000 reduction in basis in the principal residence. Taxslayer com login For 2012, B chooses to change to reporting the discharge of indebtedness using the method described in section 6. Taxslayer com login 02(1) of this revenue procedure. Taxslayer com login Thus, B files a 2012 Form 982 with B’s timely filed (including extensions) 2012 federal income tax return, and on line 10(b) of that form, B reports a $20,000 basis reduction in the principal residence ($30,000 basis reduction that B would have excluded from income in 2010 using the method described in section 6. Taxslayer com login 02(1) of this revenue procedure, minus the $10,000 basis reduction that B reported on B’s 2011 Form 982). Taxslayer com login (4) If a HAMP-PRA borrower reports the entire HAMP-PRA discharge using the method described in section 6. Taxslayer com login 02(1) of this revenue procedure, and if that HAMP-PRA borrower’s mortgage loan ceases to be in good standing during the Three-year Period as described in section 2. Taxslayer com login 10 of this revenue procedure, then some or all of the anticipated reductions in the PRA Adjusted Forbearance Amount will not take place. Taxslayer com login Because the amount of these anticipated reductions was not included in determining the issue price of the new mortgage loan that, pursuant to § 1. Taxslayer com login 1001-3, the HAMP-PRA borrower is deemed to issue in satisfaction of the old mortgage loan, the issue price of the new mortgage loan was understated. Taxslayer com login Under these circumstances, the discharge of indebtedness income determined as of the date of the permanent modification will have been overstated. Taxslayer com login (5) The Service will not challenge a HAMP-PRA borrower who is described in section 6. Taxslayer com login 03(4) of this revenue procedure and who takes the following corrective measures: (i) If a HAMP-PRA borrower included any of the discharge of indebtedness in gross income, the HAMP-PRA borrower may file an amended return that does not include the amount of the discharge of indebtedness that was previously reported as gross income but that, because of the HAMP-PRA borrower’s failure to keep the new mortgage loan in good standing, was not ultimately discharged. Taxslayer com login The amended return should be for the taxable year in which the income was included (that is, the year of the permanent modification), provided the applicable statute of limitations remains open for that taxable year. Taxslayer com login (ii) If the HAMP-PRA borrower did not include any of the discharge of indebtedness in gross income (that is, if the HAMP-PRA borrower excluded all of it), the HAMP-PRA borrower may file a new Form 982 that the Service will treat as superseding the earlier Form 982. Taxslayer com login The new Form 982 will reflect the revised reduction in basis or in tax attributes (under § 108(h)(1) or § 108(b)). Taxslayer com login The new Form 982 should be the Form 982 for the year of the permanent modification and should be filed with the return for the taxable year in which the HAMP-PRA borrower’s mortgage loan ceased to be in good standing. Taxslayer com login . Taxslayer com login 04 HAMP-PRA borrowers who choose to treat the HAMP-PRA discharge as being realized on the dates on which the unpaid principal balance of the mortgage loan is reduced. Taxslayer com login (1) If a HAMP-PRA borrower chooses to realize the HAMP-PRA discharge at the times that the unpaid principal balance on the new mortgage loan is reduced, instead of at the time of the permanent modification, then the HAMP-PRA borrower’s federal income tax returns for the taxable year that contains the permanent modification and for the subsequent taxable years must not treat any of the discharge as being realized at the time of the permanent modification and must treat the entire HAMP-PRA discharge as being realized in the amounts—and at the times—of the reductions in the unpaid principal balance. Taxslayer com login Except as described in the last sentence of this paragraph, therefore, the income tax return for the year of the permanent modification must include no gross income from—nor report on Form 982 an exclusion of—any amount of the HAMP-PRA discharge. Taxslayer com login Instead, the HAMP-PRA discharge is included in gross income (or is reported on Form 982 as excluded from gross income) in the subsequent years in which the unpaid principal balance is reduced. Taxslayer com login If the first such reduction occurs in the year of the permanent modification, however, then the amount of any such reduction is reflected as an inclusion or exclusion on the federal income tax return for that year. Taxslayer com login (2) A HAMP-PRA borrower who has been using the method described in section 6. Taxslayer com login 02(1) of this revenue procedure may change to the method described in section 6. Taxslayer com login 02(2) but must comply with the consistency and open-year requirements described in section 6. Taxslayer com login 01 of this revenue procedure. Taxslayer com login SECTION 7. Taxslayer com login PENALTY RELIEF FOR 2012 . Taxslayer com login 01 The Service will not assert penalties under § 6721 or § 6722 against an investor for failing to timely file and furnish a 2012 Form 1099-C as required by section 5. Taxslayer com login 03 through 5. Taxslayer com login 04 and section 8. Taxslayer com login 02 of this revenue procedure with respect to discharge of indebtedness resulting from HAMP-PRA permanent modifications that take place during calendar year 2012 if the following requirements are satisfied: (1) Not later than February 28, 2013, a statement is sent to the HAMP-PRA borrower containing the following: (a) The HAMP-PRA borrower’s name, address, and taxpayer identification number; and (b) The date and amount of the discharge of indebtedness (as described in sections 4. Taxslayer com login 01 through 4. Taxslayer com login 04 of this revenue procedure) that is required to be reported for 2012. Taxslayer com login (2) Not later than March 28, 2013, a statement is sent to the Service. Taxslayer com login It must be in the form of a single statement that separately lists for each HAMP-PRA borrower the information specified in section 7. Taxslayer com login 01(1) of this revenue procedure. Taxslayer com login The statement should be sent to the Service at the following address: Internal Revenue Service Center Stop 6728AUSC Austin, TX 73301 . Taxslayer com login 02 The Service will not assert penalties under § 6721 or § 6722 with respect to any Forms 1099-MISC for 2012 that sections 5. Taxslayer com login 06 and 8. Taxslayer com login 02 of this revenue procedure require to be filed with the Service and furnished to taxpayers. Taxslayer com login . Taxslayer com login 03 Section 8. Taxslayer com login 03 and 8. Taxslayer com login 04 of this revenue procedure, below, describes penalty relief regarding Forms 1099-C and 1099-MISC for 2010 and 2011. Taxslayer com login SECTION 8. Taxslayer com login SCOPE AND EFFECTIVE DATE . Taxslayer com login 01 This revenue procedure applies to all borrowers, investors, and servicers who participate, or have participated, in the HAMP-PRA, regardless of when the permanent modification occurs. Taxslayer com login . Taxslayer com login 02 Section 5 of this revenue procedure is effective for Forms 1099-C and 1099-MISC due or filed after January 24, 2013. Taxslayer com login . Taxslayer com login 03 Because of the effective date in section 8. Taxslayer com login 02 of this revenue procedure, an investor is not subject to penalties under § 6721 or § 6722 on the grounds that the investor failed to timely file and furnish a 2010 or 2011 Form 1099-C as described in section 5. Taxslayer com login 03 through 5. Taxslayer com login 04 of this revenue procedure (or on the grounds that the investor filed or furnished a 2010 or 2011 Form 1099-C that is inconsistent with section 5. Taxslayer com login 03 through 5. Taxslayer com login 04 of this revenue procedure), provided that the investor demonstrates a good faith attempt to comply with the requirements of § 6050P and that the failure was not due to willful neglect. Taxslayer com login . Taxslayer com login 04 Because of the effective date in section 8. Taxslayer com login 02 of this revenue procedure, the Service will not assert penalties under § 6721 or § 6722 on the grounds of a failure to timely file and furnish a 2010 or 2011 Form 1099-MISC, as described in section 5. Taxslayer com login 06 of this revenue procedure. Taxslayer com login SECTION 9. Taxslayer com login DRAFTING INFORMATION The principal authors of this revenue procedure are Ronald J. Taxslayer com login Goldstein of the Office of Chief Counsel (Procedure and Administration); Shareen S. Taxslayer com login Pflanz and Sheldon A. Taxslayer com login Iskow of the Office of Chief Counsel (Income Tax and Accounting); and Andrea M. Taxslayer com login Hoffenson of the Office of Chief Counsel (Financial Institutions and Products). Taxslayer com login For further information regarding this revenue procedure, contact Procedure and Administration branch 1 at (202) 622-4910, Income Tax and Accounting branch 4 at (202) 622-4920, or Financial Institutions and Products branch 1 at (202) 622-3920 (not toll-free calls). Taxslayer com login Prev  Up  Next   Home   More Internal Revenue Bulletins
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Taxslayer com login Publication 925 - Additional Material Prev  Up  Next   Home   More Online Publications