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Financial Services Law Insights and Observations

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  • IRS: Lenders should not report PPP debt forgiveness

    Federal Issues

    On September 22, the IRS released Announcement 2020-12 notifying lenders that they should not report the amount of qualifying loan forgiveness for covered loans to qualifying small businesses made under the Paycheck Protection Program (PPP).The IRS code generally requires lenders to file a Form 1099-C for any discharge of indebtedness of at least $600. However, the IRS’ announcement specifies that when a portion or all of the principal is forgiven under the requirements of Section 1106 of the CARES Act, lenders, for federal income tax purposes only, should not “file a Form 1099-C information return with the IRS or provide a payee statement to the eligible recipient under section 6050P of the Code as a result of the qualifying forgiveness.”

    Federal Issues CARES Act SBA Covid-19 IRS

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  • Treasury launches Employee Retention Credit to encourage employment

    Federal Issues

    On March 31, the Treasury Department and the Internal Revenue Service launched the Employee Retention Credit, a resource designed to encourage businesses to keep employees on their payroll during the Covid-19 outbreak. The resource is a refundable tax credit of 50 percent of up to $10,000 in wages paid by an eligible employer whose business has been financially impacted by Covid-19. Employers of all sizes, including tax-exempt organizations may qualify to receive the employee retention credit if either: (i) the employer’s business is fully or partially suspended by government order due to Covid-19 during the calendar quarter; or (ii) the employer’s gross receipts are below 50 percent of the comparable quarter in 2019. Once the employer’s gross receipts go above 80 percent of a comparable quarter in 2019 they no longer qualify after the end of that quarter. State and local governments and their instrumentalities, and small businesses who take Small Business Loans are not eligible for the employee retention credit. The credit applies to wages paid after March 12, 2020 and before January 1, 2021, and cover both cash payments and a portion of the cost of employer provided health care.

    Federal Issues Department of Treasury IRS Covid-19 Health Care

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  • District Court approves class settlement in mortgage tax action

    Courts

    On January 15, the U.S. District Court for the Southern District of California granted final approval of a class action settlement between homeowners and a mortgage company to resolve allegations that the company violated the Internal Revenue Code by failing to report deferred mortgage interest from certain consumers with adjustable rate mortgages (ARM), which allegedly prevented consumers from fully benefiting from the mortgage tax credit. According to the approval order, the plaintiffs contended that “even though the accrued interest is added back to principal, the negative amortization is still interest that should have been reported” to the IRS. However, the order notes that the court previously rejected this theory in part, finding that 26 U.S.C. § 6050H “is ambiguous as to ‘how, whether and when’ such interest must be reported.” Furthermore, the order notes that in 2016 the company began investigating and reporting the negative amortization on loans received via transfer from other companies that allegedly failed to include the negative amortization in their data. These transferred loans, the company asserted, were the only instances where it failed to report negative amortization. Under the terms of the settlement, the company is required to provide amended mortgage interest statements to homeowners whose capitalized interest was incorrectly reported to the IRS for the 2016 through 2018 tax years.

    Courts Mortgages Settlement Class Action Adjustable Rate Mortgage IRS

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  • 3rd Circuit says IRS reporting language may violate FDCPA

    Courts

    On September 24, the U.S. Court of Appeals for the 3rd Circuit reversed the district court’s dismissal of a putative class action alleging a debt collector violated the FDCPA by including a statement noting that debt forgiveness may be reported to the IRS. The case was centered on the plaintiffs’ claim that letters sent to collect on debts that were less than $600, which contained the language “[w]e are not obligated to renew this offer. We will report forgiveness of debt as required by IRS regulations. Reporting is not required every time a debt is canceled or settled, and might not be required in your case,” were “false, deceptive and misleading” under the FDCPA because only discharged debts over $600 are required to be reported to the IRS. The district court dismissed the action, concluding the letters were not deceptive and the least sophisticated consumer would interpret the statement to mean in certain circumstances some discharges are reportable but not all are reportable.

    Upon appeal, the 3rd Circuit disagreed with the district court, finding “the least sophisticated debtor could be left with the impression that reporting could occur,” notwithstanding the letter’s qualifying statement that reporting is not required every time a debt is canceled or settled, and therefore, the language could signal a potential FDCPA violation. Recognizing the industry’s regular use of form letters, the appeals court noted, “we must reinforce that convenience does not excuse a potential violation of the FDCPA.”

    Courts Third Circuit Appellate IRS FDCPA Debt Collection Class Action

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  • IRS issues reporting guidance for MIP

    Lending

    On February 22, the IRS issued a notice providing guidance to mortgage lenders on the reporting of mortgage insurance premiums (MIP) treated as qualified residence interest. The IRS emphasizes that MIP paid or accrued through December 31, 2017 will be deductible for eligible taxpayers and informs lenders to report MIP received in 2017 on Form 1098. If a lender has already filed Form 1098 and did not include the reportable MIP, the IRS requires lenders to file corrected forms by the filing due date and to furnish corrected statements to borrowers by March 15.

    Lending Mortgages IRS Mortgage Insurance Premiums

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  • Sens. Portman, Bennet Introduce Bipartisan Electronic Signature Standards Act

    Fintech

    On May 9, Senators Rob Portman (R-Ohio) and Michael Bennet (D-Colo.) introduced legislation that would make it easier for taxpayers to be represented in disputes with the Internal Revenue Service (IRS). As set forth in a press release issued by Sen. Portman’s office, the Electronic Signature Standards Act (S. 1074) would amend the Internal Revenue Code of 1986 by providing uniform standards for the use of electronic signatures for third-party disclosure authorizations, and thereby would “make it easier, and faster, for professional tax experts to represent taxpayers before the IRS by instituting electronic signature standards for third party disclosure authorization forms.” Notably, the IRS already uses electronic signatures for Form 4506-T (Request for a Transcript of Tax Return), which is commonly used in the mortgage industry. The use of electronic signatures on these forms has allowed the IRS to process over 20 million of these forms a year, and the Electronic Signature Standards Act would extend similar electronic signature requirements to Form 2848 (Power of Attorney and Declaration of Representative) and Form 8821 (Tax Information Authorization). These forms are required before a professional tax expert can begin representing a taxpayer before the IRS. “Taxpayers deserve quick access to the IRS, and this bill makes that access possible,” said Sen. Portman.

    Fintech Electronic Signatures IRS Federal Issues Federal Legislation

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  • IRS Releases Annual Criminal Investigations Report for FY2016

    Financial Crimes

    On February 27, the IRS announced the release of its Annual Criminal Investigation Report (“Report”), discussing the significant accomplishments and criminal enforcement actions taken by the IRS in fiscal year 2016. Highlights in the Report include case examples on a range of matters, including money laundering, public corruption, terrorist financing and narcotics trafficking financial crimes, as well as a discussion of a drop in the number of agents and professional staff at the IRS, and a drop in the total number cases brought for the third consecutive year.

    Financial Crimes IRS Anti-Money Laundering

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  • IG Report Concludes that IRS Lacks Compliance Strategy For Virtual Currencies

    Fintech

    On November 8, the Treasury Inspector General for Tax Administration (TIGTA) released a report evaluating the IRS’s strategy for addressing income produced via virtual currencies. The report which was completed on Sept. 21, but released Tuesday, observed that none of the agency’s divisions have yet developed any type of compliance initiatives or guidelines for conducting examinations or investigations specific to tax noncompliance related to virtual currencies. Accordingly, the TIGTA recommended that the IRS develop a comprehensive strategy for virtual currencies such as Bitcoin to help ensure compliance with tax law. The report also recommended that the IRS provide updated guidance to reflect the necessary documentation requirements and tax treatments necessary for the various uses of virtual currency and that the agency revise third-party reporting documents so that they identify how much virtual currency was used in taxable transactions. The IRS agreed with each of these three recommendations.

    Digital Commerce IRS Compliance Department of Treasury Virtual Currency Miscellany

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  • Treasury Announces Beneficial Ownership Legislation; Proposes Foreign-Owned Single-Member LLC Regulations

    Consumer Finance

    Recently, the Treasury Department announced that it is sending Congress legislation that would require companies formed within the United States, or “that [use] the mail, wire, or any facility in interstate or foreign commerce in its formation, transfer of ownership, or business activity,” to file beneficial ownership information with the Department, and would impose a $5,000 penalty for failure to comply. The proposed legislation defers to the Department of the Treasury to define beneficial ownership. The new draft legislation also proposes technical amendments to FinCEN’s Geographic Targeting Order (GTO) authority to provide FinCEN the authority to collect information on funds transfers in general, including regarding bank wire transfers, instead of transactions using “monetary instruments.”

    Treasury simultaneously announced proposed regulations to require foreign-owned “disregarded entities” to obtain an employer identification number with the IRS. The proposed regulations are intended to address “a narrow class of foreign-owned U.S. entities – typically single member LLCs – that have no obligation to report information to the IRS or to get a tax identification number.” These "disregarded entities” (which include foreign-owned-single-member LLCs) can, according to Treasury, be used to shield non-U.S. assets’ or non-U.S. bank accounts’ foreign owners. If finalized, the regulations would assist the IRS in determining whether a tax liability exists, and if so, how much. Finally, the regulations would allow the IRS to share information with other tax authorities.

    FinCEN IRS Department of Treasury GTO

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  • California Federal Court Holds Bank Responsible For Funds Subject To IRS Levy On Customer's Account

    Consumer Finance

    On August 15, the U.S. District Court for the Central District of California held that a bank responded too slowly to a government levy on a customer’s account and was therefore responsible for funds subsequently removed by the customer. The IRS notified the bank of a jeopardy levy on the account of a customer who received an improper tax refund and refused to return those funds to the government. Before the bank acted on the notice, the customer removed the funds from his account and the IRS was unable to recover them. The government then turned to the bank for relief, asserting that under the Internal Revenue Code, any person who fails or refuses to surrender any property subject to a levy is liable to the government. The court held that although the statute does not require the bank to immediately surrender the property, the bank was required, upon receiving notice, “to preserve that property or run the risk of paying the depositor’s tax bill.” The court explained that once the levy was served on the bank, the bank was in the best position to protect the property, and that even if the bank acted reasonably—i.e., without any undue delay—it could still be liable for the levied property.

    IRS Retail Banking

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