The IRS has released guidance providing that certain information forms should not be filed that relate to items made tax exempt by the COVID-related Tax Relief Act of 2020,[1] as well as directing institutions that had already issued Forms 1099MISC related to payments made by the SBA on loans to file amended information returns[2] that contained an implied threat that those that fail to update those forms in a timely manner will face potential penalties.

Information Return Relief

The IRS had provided guidance in Announcement 2020-12 prior to the passage of the COVID-related Tax Relief Act of 2020 that provided that Forms 1099C for relief of indebtedness should not be issued for PPP loan forgiveness as CARES Act §1106(i) had provided such relief would not be subject to tax.[3]

The COVID-related Tax Relief Act expanded the tax exempt treatment to cover a number of other relief programs enacted both under the CARES Act and in the various provisions found in the overall Consolidated Appropriations Act, 2021. The Act also provided that the IRS was granted the authority to provide an exemption from certain information return requirements:

Section 279 of the COVID Relief Act authorizes the Secretary of the Treasury or the Secretary's delegate to provide an exception from any requirement to file an information return otherwise required under chapter 61 of the Code with respect to any amount excluded from gross income by reason of section 7A(i) of the Small Business Act or sections 276(b), 277, or 278 of the COVID Relief Act.[4]

The IRS in Notice 2021-6 made use of that authority to provide the following relief:

Under the authority provided by section 279 of the COVID Relief Act, the Treasury Department and the IRS waive the requirement to file information returns or furnish payee statements as described in the following list:

1. Original PPP covered loan forgiveness. A lender is not required to file with the IRS, or furnish to a borrower, a Form 1099-C reporting forgiveness of PPP covered loans under section 7A(i) of the Small Business Act as redesignated, transferred, and amended by the Economic Aid Act.

2. PPP II covered loan forgiveness. A lender is not required to file with the IRS, or furnish to a borrower, a Form 1099-C reporting forgiveness of PPP II covered loans under section 311 of the Economic Aid Act.

3. Student emergency financial aid grants. A grantor is not required to file with the IRS, or furnish to a student, a Form 1099-MISC, Miscellaneous Information, reporting the payment of an emergency grant to the student under section 3504, 18004, or 18008 of the CARES Act or another emergency financial aid grant described in section 277(b)(3) of the COVID Relief Act made to students in response to qualifying emergencies.

4. Treasury Program loan forgiveness. A lender is not required to file with the IRS, or furnish to a borrower, a Form 1099-C reporting forgiveness of loans under section 1109 of the CARES Act.

5. EIDL grants. The Administrator is not required to file with the IRS, or furnish to a recipient, a Form 1099-MISC reporting the payment of an advance under section 1110(e) of the CARES Act or a grant under section 331 of the Economic Aid Act.

6. Loan subsidies. Neither the Administrator nor a lender is required to file with the IRS, or furnish to a borrower, a Form 1099-MISC reporting the payment of principal, interest, and any associated fees through a loan subsidy authorized under section 1112(c) of the CARES Act.

7. Shuttered venue operator grants. The Administrator is not required to file with the IRS, or furnish to a recipient, a Form 1099-MISC reporting the payment of a grant to a shuttered venue operator under section 324(b) of the Economic Aid Act.[5]

The Notice limits its relief to items covered in the COVID-related Tax Relief Act and does not eliminate the need to file other information returns:

The waivers of information reporting requirements described in section III of this notice apply only to requirements to file and furnish Form 1099 series information returns and payee statements for the described grants, payments, subsidies, or loan forgiveness, which are excluded from gross income. The waivers do not affect any requirements to file and furnish other forms, such as forms in the 1098 series. For example, the waiver does not apply to the requirement to file and furnish Form 1098-T, Tuition Statement, with respect to any payments received for qualified tuition and related expenses, including qualified tuition and related expenses paid with grants described in this notice.[6]

Interest Paid by the SBA Under CARES Act §1112

The guidance also contains a clarification regarding the reporting of interest paid by the Small Business Administration under CARES Act §1112, noting that such interest is deductible by the borrower and such interest should be reported on any Forms 1098 the lender is required to file:

Because borrowers may deduct mortgage interest that the Small Business Administration (SBA) paid to lenders under section 1112 of the CARES Act, lenders may include those mortgage interest payments in Box 1 of Form 1098, Mortgage Interest Statement, notwithstanding § 1.6050H-1(e)(3)(ii) of the Income Tax Regulations. The payments should be included on both the Form 1098 that is filed with the IRS and the copy that is furnished to borrowers. Including this interest on Form 1098 will inform borrowers of the total amount of mortgage interest they may deduct. In addition, this reporting will avoid discrepancies between interest reported to the IRS and interest claimed as a deduction by borrowers on their income tax returns.[7]

This also contains a “suggestion” to lenders that if they had filed Forms 1098 omitting this interest that a corrected Form 1098 should be filed.

The filing of information returns with the IRS omitting mortgage interest that the SBA paid to lenders under section 1112 of the CARES Act could result in the issuance of underreporter notices (IRS Letter CP2000) to eligible recipients who correctly deduct that interest. Lenders who are unable to furnish by February 1, 2021, a Form 1098 to a borrower that includes mortgage interest that the SBA paid to lenders under section 1112 of the CARES Act may furnish a corrected Form 1098 including this interest in box 1. Lenders are encouraged to do so as promptly as possible.[8]

Requirement to Amend Certain Information Returns

The IRS may have concluded that some payors were treating Notice 2021-6’s relief to be a voluntary bit of guidance, and that they could continue to simply issue 1099s the way they previously planned to, avoiding having to reprogram systems that generate such filings for the payor.

In Announcement 2021-2 the IRS made it clear that for at least one set of information returns, the IRS does not see compliance with the relief found in Notice 2021-6 as being optional. While the language for the Forms 1098 suggested lenders “may” furnish corrected Forms 1098 and encouraged them to do so as soon as possible, the IRS when looking at 1099MISC forms issued for the SBA’s payment of certain loans issued more direct language mandating a fix.

The Announcement begins as follows:

This announcement notifies lenders who have filed with the Internal Revenue Service (IRS), or furnished to a borrower, a Form 1099-MISC, Miscellaneous Information, reporting certain payments on loans subsidized by the Administrator of the U.S. Small Business Administration (Administrator) as income of the borrower that the lenders must file and furnish corrected Forms 1099-MISC that exclude these subsidized loan payments.[9]

The IRS provides the following mandate in the Announcement:

If a lender has already furnished to borrowers Forms 1099-MISC that report these loan payments, whether before, on, or after December 27, 2020, the lender must furnish to the borrowers corrected Forms 1099-MISC that exclude these loan payments. In addition, if a lender has already filed with the IRS Forms 1099-MISC that report these loan payments, whether before, on, or after December 27, 2020, the lender must file with the IRS corrected Forms 1099-MISC that exclude these loan payments. Directions for how to file corrected Forms 1099-MISC are included in the 2020 Instructions for Forms 1099-MISC and 1099-NEC and the 2020 General Instructions for Certain Information Returns.[10]

And just in case a lender is tempted to ask what happens if they don’t send out the corrections, the IRS threatens lenders who fail to promptly file corrected forms with penalties.

If a lender described in this announcement furnishes corrected payee statements within 30 days of the furnishing deadline, it will have reasonable cause for any failure-to-furnish penalty imposed under section 6722. A lender described in this announcement must file corrected information returns by the filing deadline in order to avoid section 6721 failure-to-file penalties.[11]

While the Announcement is limited to the Form 1099-MISC forms for these SBA payments, presumably the same logic that would allow the IRS to penalize a lender for failing to revise those forms could be applied for the other forms that Notice 2021-6 revised the reporting on.

[1] Notice 2021-6, January 19, 2021, https://www.taxnotes.com/research/federal/irs-guidance/notices/reporting-requirement-waived-for-some-excluded-amounts/2l6h5 (retrieved February 2, 2021)

[2] Announcement 2021-2, February 1, 2021, https://www.taxnotes.com/research/federal/irs-guidance/announcements/some-lenders-will-need-to-file-corrected-forms-1099-misc/2r3p4 (retrieved February 2, 2021)

[3] Announcement 2020-12, September 22, 2020, https://www.taxnotes.com/research/federal/irs-guidance/announcements/irs-forgives-information-reporting-for-ppp-loans%c2%a0/2czjj (retrieved February 2, 2021)

[4] Notice 2021-6, Section II

[5] Notice 2021-6, Section III

[6] Notice 2021-6, Section IV

[7] Notice 2021-6, Section IV

[8] Notice 2021-6, Section IV

[9] Announcement 2021-2

[10] Announcement 2021-2

[11] Announcement 2021-2