More taxpayers qualify for COD student loan relief

The IRS has extended its Debt Cancellation Income Acknowledgment (COD) safe haven relief for students whose loans were canceled either because their schools were closed or as a result of a certain type of fraud (Rev. Proc. 2020-11). The IRS had previously granted aid to students at Corinthian College or the American Career Institutes Inc. whose loans had been canceled by the Department of Education as part of the “closed school” or cancellation process. “Reimbursement defense” (Rev. Proc. 2015-57 and Rev. Proc. 2017-24). Rev. Proc. 2018-39 provided relief to students at schools whose loans were canceled as part of a settlement of a legal cause of action resolving various allegations of illegal business practices, including unfair, deceptive and abusive.

The IRS has determined that it is appropriate to give relief to students from other schools who have obtained federal or private student loans and who qualify for one of the following safety rules:

  • Borrowers participating in the closed school exit process in which the student or a parent on behalf of the student obtained a federal loan, and who was attending a school when it closed or who withdrew from the school. school within a certain period of time before the closing date;
  • Borrowers whose loans have been canceled as part of the repayment defense process, which allows the Department of Education to pay off a federal direct loan obtained by a student or parent on behalf of a student, if the the borrower establishes, as a defense against repayment, that the actions of a school would give rise to a cause of action against the school under applicable state law; Where
  • Borrowers participating in a court settlement discharge process where federal and state agencies filed lawsuits that resulted in settlements resolving various allegations of illegal business practices, including unfair, deceptive and abusive acts and practices, against for-profit schools and some of the private lenders who have provided student loans to fund attendance at these schools.

The IRS recognizes that many of these students could benefit from a rebate of COD income recognition under other Code provisions, such as the insolvency provision, but wishes to make it easier for students to determine s ‘they are eligible for exclusion.

Additionally, the IRS will not assert that a creditor that is an “applicable entity” under Sec. 6050P must file information returns and provide payee statements for the settlement of any debt in this tax process. Filing these information returns with the IRS could result in the Service’s erroneous issuance of underreporting notices to taxpayers, and providing beneficiary returns to taxpayers could be confusing. This means the IRS doesn’t want creditors to file 1099-C forms, Debt cancellation, for taxpayers who are entitled to this relief.

Sally P. Schreiber, JD, ([email protected]) is a JofA senior editor.

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