What IRS Form 1099-LS (2022) Is For
IRS Form 1099-LS (2022) is used to report a reportable life insurance sale to the Internal Revenue Service. This form is filed when a life insurance contract is sold or transferred to a buyer who has no substantial family, business, or financial relationship with the insured. It allows the IRS to track life settlement transactions, verify taxable income, and ensure proper reporting on the seller’s income tax return.
When You’d Use IRS Form 1099-LS (2022)
This form applies whenever a life insurance policy is sold or transferred to an unrelated party, such as an investor or company, for cash or settlement proceeds. Below are the main cases that require filing Form 1099-LS (2022):
- Life Settlement Transaction: This applies when a life insurance policy is sold to an investor or settlement company that acquires ownership rights for profit purposes.
- Viatical Settlement: This occurs when an insured person who is terminally ill sells their policy to obtain immediate funds.
- Multiple Payment Recipients: This is required when more than one party, such as a seller and broker, each receives at least $600 from the transaction proceeds.
- Amended or Corrected Filings: This applies when the original filing included incorrect information, such as an inaccurate policy number or payment amount.
- Rescinded Sales: This applies when a reportable policy sale is canceled within the same calendar year, and a corrected form must be filed with the IRS.
If you face IRS penalties for late or incorrect Form 1099-LS filings, you may be able to request IRS penalty abatement for filing errors to help reduce or eliminate those penalties.
Key Rules or Details for the 2022 Tax Year
These are the primary filing rules and reporting requirements for IRS Form 1099-LS (2022) during the 2022 tax year:
- Who Must File: The acquirer who purchases a life insurance contract must file Form 1099-LS and report all details related to the reportable life insurance sale.
- Who Receives Copies: The payment recipient, seller, and life insurance carrier each receive copies of the form to ensure accurate reporting of proceeds and ownership changes.
- Filing Deadlines: The acquirer must furnish copies to payment recipients by January 31 and submit filings to the Internal Revenue Service by the next business day when using e-file.
- TIN Requirements: The taxpayer identification number for each party must be accurate, and the acquirer’s TIN must also appear correctly to prevent penalties or withholding.
- Exceptions: The filing requirement does not apply to transfers made to family members, section 1035 exchanges, or acquisitions by a qualifying foreign person.
If you receive a notice or follow-up from the IRS, understanding the IRS collection process can help you respond appropriately and avoid further issues.
Step-by-Step (High Level)
The following steps outline the general process for completing and filing IRS Form 1099-LS (2022):
- Determine Filing Requirement: Confirm whether the transaction qualifies as a reportable policy sale by assessing the relationship between the buyer and the insured.
- Gather Information: Collect details such as the seller’s name, address, taxpayer identification number, policy number, acquirer’s information, and settlement amount.
- Complete the Form: Accurately fill in the payer and payment recipient’s details, policy number, date of sale, and total amount paid, following all IRS form instructions.
- File with the Internal Revenue Service: Submit Copy A with Form 1096 if filing by paper, or use the IRS FIRE system to e-file the form electronically.
- Furnish Copies: Provide Copy B to the payment recipient and Copy C to the life insurance carrier no later than the IRS filing deadline for the tax year.
- Retain Records: Keep copies of all submitted forms and related documents for at least four years in case of audit or verification of the income tax return.
If you want a tax professional to communicate with the IRS or handle your filings, consider setting up a Power of Attorney for IRS communications.
Common Mistakes and How to Avoid Them
The following are common filing errors related to IRS Form 1099-LS (2022) and how to prevent them:
- Failing to File When Required: Always determine whether a transaction qualifies as a reportable life insurance sale; when uncertain, it is safer to file than risk penalties for noncompliance.
- Incorrect or Missing Taxpayer Identification Numbers: Use Form W-9 to collect each recipient’s taxpayer identification number and verify accuracy before submitting the form to the Internal Revenue Service.
- Failure to Furnish Copies: Remember that direct acquisitions require furnishing copies to both the payment recipient and the life insurance carrier to ensure complete documentation of the sale.
- Wrong Settlement Amounts: Ensure that Box 1 displays the correct payment for each recipient, not the total policy purchase price if multiple parties shared the proceeds.
- Missing the E-Filing Requirement: If filing ten or more information returns, always use the IRS FIRE system to comply with electronic filing regulations.
To ensure all life insurance settlement income is reported accurately, resolve unfiled individual returns before your next tax filing.
What Happens After You File
Once IRS Form 1099-LS (2022) is submitted, the Internal Revenue Service cross-checks the details against reported income tax returns. Electronic filers receive confirmation of acceptance or rejection, while paper filers may not receive acknowledgment unless issues arise. Sellers must use Form 1099-SB to determine their cost basis, which includes premiums paid and prior cash value, to calculate taxable income, ordinary income, or capital gains.
For help with IRS Form 1099-LS filings, tax settlement questions, or compliance concerns, start your case review with our experts today.
FAQs
What are the tax implications of selling a life insurance policy?
The money received from a life insurance settlement is taxable if it exceeds the policy’s cash surrender value and premiums paid. The seller must report this income on their tax return as either ordinary income or a long-term capital gain, depending on the nature of the transaction and investment return.
How do I calculate my cost basis for IRS Form 1099-LS (2022)?
Your cost basis equals the total premiums paid into the policy minus any prior withdrawals or loans considered before the sale. The insurance company will issue Form 1099-SB showing the seller’s investment, which helps determine taxable income and any capital gain resulting from the sale.
Do I need to file IRS Form 1099-LS if I recently sold my policy to a foreign person?
Generally, yes, the acquirer must file a Form 1099-LS reportable if the transaction qualifies as a reportable policy sale. However, if the buyer is a qualifying foreign person exempt under IRS rules, the acquirer may not be required to file, depending on the nature of the acquisition.
What if I made an error while filing Form 1099-LS for a life insurance settlement?
If errors occur—such as an incorrect address, policy number, or payment recipient’s details—the acquirer must file Form 1099-LS (Corrected) within the same calendar year.
Are there IRS forms related to Form 1099-LS I should also file?
Yes, sellers should review both Form 1099-SB and Form 1096 for accuracy in cross-reporting. The IRS may request supporting forms showing how the sale was taxed, the settlement amount received, and the cost basis determined.
