IRS Requirements

Information Returns

  • Information returns made to the IRS by a credit union are essentially used by the IRS to confirm the truthfulness of members’ tax returns.
  • A copy of an information return must be delivered to each affected member by January 31, 2011. A copy must be delivered to the IRS by February 28, 2011, on paper and by March 31, 2011, if filing electronically.

IRS Form 1098 — Mortgage Interest

  • Required each calendar year in which a credit union receives $600 or more in mortgage interest and points from a member.
  • The $600 threshold applies separately to each mortgage.

IRS Form 1098-E — Student Loan Interest Statement

  • Required if, during any calendar year, a credit union receives at least $600 in interest from a member on a “covered student loan.”
  • A loan does not necessarily need to be made as part of a guaranteed student loan program in order to be a “covered student loan” for tax purposes. A “covered student loan” is one that is made to a member solely for that member’s (or that member’s spouse’s or dependent’s) educational expenses paid within a reasonable time before or after the loan was taken out and that either:
  • Qualifies as part of a guaranteed student loan program of the federal, state, or local government; or
  • Is documented by the member’s certification on IRS Form W-9S that the loan proceeds were used solely for educational expenses.

IRS Form 1099-INT — Interest Income

Required if:

  • A memberwas paid at least $10 in interest or dividends during a calendar year, or
  • Federal income tax was withheld under the backup withholding rules regardless of the amount withheld.

IRS Form 1099-C — Discharge of Indebtedness

  • Required for forgiveness of debt more than $600 (except in the case of mortgage loans)
  • Required for the following “Identifiable events”:
  • A debt discharged in bankruptcy, but only if the credit union knows from its books and records that the debt was for business or investment purposes.
  • A discharge of indebtedness pursuant to an agreement between the credit union and the member.
  • A discharge of indebtedness as a result of a credit union decision to discontinue its collection activity against the debtor.
  • A debt for which the 36-month “nonpayment testing period” has expired.
  • A debt that is canceled or extinguished due to the expiration of the statute of limitations
  • A debt that is canceled or extinguished in receivership or foreclosure in a stateor federal court.
  • A debt that is canceled or extinguished pursuant to the credit union’s election of foreclosure remedies.
  • A debt that is canceled or extinguished — rendering it unenforceable —pursuant to a probate or similar hearing.

IRS Form 990 — Return of Organization Exempt from Income Tax

  • Required to be filed annually by state-chartered credit unions (not required for federally chartered credit unions).
  • Public document used to obtain information about the operations of tax-exempt organizations.

Special Mailing Requirements

  • Information returns must be either hand-delivered or sent by first-class mail to the member’s last known address.
  • They can be attached by perforation to a member’s year-end statement, or sent separately.
  • If an information return is attached to a member’s year-end credit union statement, the credit union statement must be stamped in bold and conspicuous type: “IMPORTANT TAX DOCUMENT ATTACHED.”
  • No other enclosures are permitted with a mailing of an information return to a credit union member although the credit union’s logo may appear on the statement.
  • The envelope that contains a member’s information return(s) must include on its face, also in bold and conspicuous type: “IMPORTANT TAX DOCUMENT ENCLOSED.” A credit union logo may also appear on the envelope.

Electronic Delivery of Payee Statements

The following IRS may be furnished to members electronically using E-sign rules:

  • 1098
  • 1098-C
  • 1098-E
  • 1099-INT
  • 1099-C
  • 1099- MISC,
  • 5498
  • W-2

Penalties for Failure to File Information Returns

  • Within 30 days of the filing date, then the penalty is a maximum of $15 per return, with the total penalty not to exceed $75,000.
  • After 30 days, but by August 1 of the year the return is required, then the penalty is a maximum of $30 per return with the total penalty not to exceed $150,000.
  • After August 1 of the year the return is required, then the penalty is $50 per return, with the total penalty not to exceed $250,000.
  • If the credit union fails to furnish a member with his or her information return by January 31, the penalties can range up to $50 per affected member, with a maximum penalty of $100,000.

Inconsequential Errors

Credit Unions will not be penalized for inconsequential errors on information returns. Inconsequential errors are any errors that do not prevent the IRS from processing a return, correlating the information with an individual’s tax return, or otherwise putting the return to its extended use.

The following types of errors are never inconsequential:

  • The member’s taxpayer identification number
  • The member’s surname
  • Any dollar amounts
  • Significant omissions in the member’s address, if the member provided them previously to the credit union
  • The manner in furnishing the information returns to the member

Record Retention

Credit unions must retain all records that contribute to the creation of each member’s information returns, and a copy of each information return itself for four years.

Backup Withholding

Credit unions are required to withhold a percentage of “reportable payments” (generally 28%) when certain conditions exist.

Reportable Payments

  • Any dividends or interest paid by a credit union to its members, unless the amount of a dividend paid to an individual member is less than $10 on an annualized basis. (For example, quarterly payments must be annualized to determine if backup withholding applies)
  • Redeemed U.S. Savings Bonds when the person redeeming the bond does not provide a taxpayer identification number, or furnishes one that is obviously incorrect

Withholding Conditions

The credit union must apply backup withholding when:

  1. A member fails to provide a TIN or certify that the TIN is correct
  2. The IRS notifies the credit union that backup withholding must begin due to a missing or incorrect TIN
  3. The IRS notifies the credit union that the member is subject to backup withholding (C-Notice)
  4. Thememberfailstocertifythatheorsheisnotsubjecttobackupwithholding (unless the member qualifies for an exemption).
  5. ThememberfailstoprovideaW-8BENordoesnotrenewtheformafterthree years.

Ending Backup Withholding

Circumstance that caused backup withholding / Stop backup withholding when:
The member failed to provide a TIN and W-9 / Credit union receives the TIN and a signed W-9
Credit union received an IRS 2100 or 2100A Notice /
  • For missing TINS, backup withholding can stop when you receive the correct TIN and W-9 certification.
  • For incorrect Name/TIN combinations, backup withholding can stop when you receive either SSA Form 7028 Notice to Third Party of Social Security Number Assignment or IRS Letter 147C from the member

Credit union received a “C-Notice” Backup Withholding Notification / Credit union receives an official notice from the IRS to stop
The member does not provide or renew IRS Form W-8BEN / Credit union receives a signed W-8BEN from the member

TIN certification

  • When a member opens a new account at a credit union, the account will not be subject to backup withholding if the member certifies, under penalty of perjury that:
  • The TIN provided by the member is correct
  • The member is not subject to backup withholding
  • The member is a U.S. person (including a U.S. resident alien). Note: Members with an ITIN also use Form W-9 Certification.
  • Obtain certification by
  • Having the member complete IRS Form W-9 or a substitute W-9.
  • Having members who are non-resident aliens complete Form W-8BEN, “Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding.”
  • Form W-8BEN must be retained by the credit union. It is valid for three calendar years after the year it was signed.

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