The ten questions below recur every January in conversations with seller-carry note holders. Each question has a clean technical answer when the records are clean, and a complicated answer when the records are gaps. The questions are framed as a holder’s self-check before sitting down with a CPA — the holder who can answer the ten below has a year-end position the CPA can finish in an hour.

Which IRS form do I owe — 1098 or 1099-INT?

The trade-or-business test controls. A single seller-carry note as a tail of a property sale points to 1099-INT. A pattern of multiple notes across years points to 1098. The grey zone sits between, and consultation with a CPA settles the classification before December 31.

Did any of my workouts trigger a 1099-C this year?

Any forgiveness of principal at six hundred dollars or more triggers a 1099-C. The trigger event is the date the identifiable event of forgiveness happened — the date of the short-payoff letter, the modification execution, or the discharge order. The form goes to the borrower by January 31 and to the IRS on the standard calendar.

Did I complete a foreclosure or accept a deed in lieu?

A foreclosure completion or deed-in-lieu acquisition triggers a 1099-A. A deficiency forgiveness on top of the acquisition triggers a 1099-C. Many foreclosure years produce both forms together. The two forms go in the same January 31 cycle to the same borrower.

Did I acquire a note at a discount this year?

A discount acquisition triggers OID accrual under §1272. The discount accrues across the remaining term of the note, and the year’s accrual sits on a 1099-OID to the borrower. The accrual is reported each year on the holder’s return as interest income — even when no cash changed hands in the year of accrual.

Did I carry back a note at below-market interest?

§1274 imputes interest on a seller-financed transaction where the stated rate is below the applicable federal rate at origination. The imputation produces phantom interest income each year, reported on the holder’s return at the imputed rate rather than the stated rate. The borrower picks up the same imputed amount as deductible interest, and the difference between stated and imputed amounts is the reportable adjustment.

Do I have a complete W-9 for each borrower?

A current W-9 sits in every loan file — captured at origination and refreshed when the borrower’s situation changes. The TIN on the W-9 goes on the 1098 or 1099, and a wrong TIN triggers an IRS B-notice. The W-9 is the single piece of paper that protects the holder against backup-withholding exposure.

Did I produce the §1024.17 escrow statement on every escrowed loan?

Regulation X §1024.17 requires an annual escrow statement to the borrower within thirty days of the escrow account computation year. The statement sits separately from the 1098 — it walks the year’s escrow activity. A missed §1024.17 statement is a compliance exposure regardless of whether the 1098 itself was filed correctly.

Did I reconcile every trust account by December 31?

The trust account where escrow funds sit is reconciled three ways — bank, ledger, sub-ledger — on December 31 of the tax year. A clean closing balance ties to the year-end §1024.17 statements and to the holder’s general ledger. A trust-account reconciliation that does not tie on December 31 is the single largest signal that something else in the records is wrong.

What state-level forms do I owe?

State filings vary. Several states require a state-level 1098 or 1099 parallel to the federal form. Several states require an annual licensed-servicer report. The deadlines are tied to the federal calendar in most states. Consult qualified legal counsel and a CPA on state-specific filings across the holder’s footprint.

What documentation do I need to retain?

The 1098 or 1099 itself, the underlying amortization schedule, the payment ledger, the W-9, the workout file, the escrow analysis, and the trust-account reconciliation are the records the IRS expects on inquiry. The federal retention minimum is three years from the original return in most cases — extended in fraud and substantial-understatement situations. State retention rules vary; the longer state rule controls.

Frequently Asked Questions

What is the single biggest year-end tax mistake?

The single biggest mistake is treating year-end as a tax event rather than an audit event. The form is the visible output; the records behind the form survive an IRS inquiry. A holder who produces the records can defend any reasonable tax position; a holder without records cannot defend a correct position.

When should I bring in a CPA for the year-end work?

Before December 31 of the tax year, not after. A CPA who reviews the records in mid-December settles open classification questions, identifies missing 1099-C or 1099-A triggers, and confirms OID and imputed-interest positions. The same review in February is reactive.

When should I bring in legal counsel?

For any workout event that involves forgiveness, any foreclosure path, any deed in lieu, and any cross-state enforcement question. Consult qualified legal counsel before the event closes, not after. The records the legal work produces double as the records the year-end filings rely on.

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