What IRS Form 1099-LS (2021) Is For
IRS Form 1099-LS (2021) is a federal tax form used to report a reportable life insurance sale to the Internal Revenue Service. It documents the sale of a life insurance policy to a buyer who has no substantial family, business, or financial relationship with the insured. This ensures the IRS tracks taxable transactions, the payment recipient receives accurate information for their income tax return, and the life insurance carrier updates its records for future benefits.
The form was introduced under the Tax Cuts and Jobs Act to improve transparency in life settlement reporting.
When You’d Use IRS Form 1099-LS (2021)
This form is required whenever a life insurance policy or contract is transferred in a reportable policy sale during the tax year.
- Acquiring a life insurance contract: You must file the form if you purchased an interest in a life insurance policy through a life settlement transaction with no substantial personal or business connection to the insured.
- Providing copies to all parties involved: Copies of Form 1099-LS must be sent to the life insurance carrier, each payment recipient, and the IRS within the specific filing deadlines established for the tax year.
- Filing late or corrected forms: If you discover an error or missed deadline, you must file a corrected Form 1099-LS immediately to reduce potential penalties and maintain IRS compliance.
- Handling rescinded policy sales: If the life insurance sale is canceled after filing, you must submit a corrected form to the IRS and recipients within fifteen calendar days after receiving notice of rescission.
If you incur IRS penalties due to errors or late submissions, you may qualify for IRS penalty abatement for filing errors to reduce or eliminate certain fines.
Key Rules or Details for Tax Year 2021
The Internal Revenue Service outlined specific filing rules and responsibilities for reportable life insurance sales under IRS Form 1099-LS (2021).
- Electronic filing requirement: If you filed 250 or more IRS forms during the 2021 calendar year, you must e-file Form 1099-LS using the IRS FIRE System to comply with electronic filing regulations.
- Who must file: The acquirer or buyer in a reportable life insurance sale must file the form, including life settlement companies or investors who have no substantial family or business relationship with the insured.
- Exceptions to filing: You may be exempt from filing if the policy transfer is considered a gift, if it qualifies under certain foreign person exemptions, or if another authorized filer reports on your behalf.
- What to report: The form requires the acquirer’s information, taxpayer identification number, policy number, payment recipient’s address, and the date of sale, ensuring accurate tracking of all parties.
- Coordination with Form 1099-SB: After receiving Form 1099-LS, the life insurance carrier must file Form 1099-SB to report the seller’s investment, including premiums paid and cost basis, to help calculate taxable gain.
Understanding the IRS collection process can help you address any notices or compliance requests following a life insurance policy sale.
Step-by-Step (High Level)
Filing Form 1099-LS correctly requires following a clear and organized process to ensure compliance with IRS filing rules.
- Determine if the sale qualifies: Confirm that the transaction meets the definition of a reportable policy sale where the acquirer has no prior substantial relationship with the insured.
- Gather all required details: Collect the acquirer’s TIN, seller’s investment details, life insurance policy number, payment recipient’s address, and other information needed for identification.
- Use the correct IRS forms: Obtain the latest versions of Form 1099-LS from the IRS website or authorized tax software, and ensure that all copies are scannable if filing on paper.
- Complete accurately: Enter the correct settlement amount, policy’s cash surrender value, and sale date, and verify that all taxpayer identification numbers and addresses are accurate.
- File and distribute copies: File Form 1099-LS with the IRS, furnish copies to payment recipients and the life insurance carrier, and retain a copy for at least four years for recordkeeping and potential verification.
If you prefer professional assistance managing IRS correspondence, consider setting up a Power of Attorney for IRS representation.
Common Mistakes and How to Avoid Them
Many filers make avoidable errors when completing IRS Form 1099-LS (2021); understanding these mistakes helps prevent costly penalties and corrections.
- Using the wrong tax form: Always use Form 1099-LS to report a reportable life insurance sale; do not substitute it with Form 1099-R or other unrelated IRS forms.
- Incorrect or missing taxpayer identification number: Request a completed Form W-9 from each payment recipient early and verify their TIN through the IRS TIN Matching program before filing.
- Mismatched information on transmittals: Ensure that names, addresses, and acquirer’s information match exactly across Form 1096 and all copies of Form 1099-LS to prevent rejections.
- Reporting incorrect payment amounts: Report the seller’s net proceeds and the full payment amounts for brokers or intermediaries to maintain accuracy in the total settlement amount.
- Missing critical deadlines: Track each deadline carefully using a filing calendar and account for weekends or following business day rules to avoid late submission penalties.
- Filing duplicate forms: Coordinate with other acquirers involved in the same transaction to ensure only one Form 1099-LS report is filed for each life insurance policy sale.
Be sure to resolve unfiled individual returns so your life insurance sale proceeds are properly reported on your federal tax return.
What Happens After You File Form 1099-LS
After filing IRS Form 1099-LS (2021), the Internal Revenue Service matches the reported information with the seller’s income tax return to verify accurate reporting of taxable income and capital gain. Once the life insurance carrier receives the form, it must prepare and file Form 1099-SB to report the seller’s investment and premiums paid on the life insurance policy.
If a policy sale leads to a tax bill you cannot pay immediately, IRS payment plans for tax bills may help you manage your obligations.
FAQs
What’s the difference between Form 1099-LS and Form 1099-SB?
Form 1099-LS reports the sale of a life insurance policy in a reportable policy sale. At the same time, Form 1099-SB is filed by the life insurance carrier to report the seller’s investment, cost basis, and premiums paid on the contract.
Do family life insurance sales count as reportable policy sales?
No, sales between family members or related parties are not considered reportable life insurance sales since a substantial personal relationship already exists.
What if the seller refuses to provide a TIN?
You must still file Form 1099-LS and initiate 24% backup withholding, documenting that you made reasonable efforts to collect the taxpayer identification number from the payment recipient.
Can multiple policies be reported on one form?
No, each reportable policy sale must have its own Form 1099-LS filing. Each life insurance contract and payment recipient requires a separate form.
Are death benefits reported on this form?
No, death benefits from life insurance policies are reported on Form 1099-R, not Form 1099-LS, since this form only applies to the sale of a policy during the insured’s lifetime.
