Form 1099-LS: Reportable Life Insurance Sale (2019 Tax Year)

What Form 1099-LS Is For

Form 1099-LS (Reportable Life Insurance Sale) is an information return used to report the sale of a life insurance contract or any interest in such a contract when that sale qualifies as a "reportable policy sale." This form was introduced following Internal Revenue Code Section 6050Y, which requires specific reporting when life insurance policies change hands under certain circumstances.

In simple terms, this form tracks transactions where someone sells their life insurance policy to another party who has no substantial family, business, or financial relationship with the person insured. These transactions are commonly known as "life settlements" or, in some cases, "viatical settlements" when the insured person is terminally or chronically ill. The form ensures the IRS can properly track and tax these transactions.

The acquirer (the person or company buying the policy) must file Form 1099-LS with the IRS and furnish copies to both the payment recipient (typically the seller, but may also include brokers or intermediaries who receive part of the sale proceeds) and the insurance company issuing the policy. This creates a paper trail that helps the IRS ensure proper tax reporting on what can be substantial financial transactions. IRS.gov

When You’d Use Form 1099-LS (Late/Amended Filing)

The standard deadline for filing Form 1099-LS for the 2019 tax year was February 28, 2020 if filing on paper, or March 31, 2020 if filing electronically. These deadlines aligned with most other 1099 forms.

Late Filing: If you missed the original deadline, you should file Form 1099-LS as soon as possible. While the IRS imposes penalties for late filing, submitting late is always better than not filing at all. Late filing penalties depend on how late you file and range from $50 to $270 per form (as of 2019), with higher penalties for intentional disregard.

Corrected Returns: If you filed Form 1099-LS but later discovered errors in the information reported (such as incorrect payment amounts, wrong taxpayer identification numbers, or inaccurate dates), you must file a corrected Form 1099-LS. Check the "CORRECTED" box at the top of the form and enter the correct information. File corrected returns as soon as you discover the error. IRS.gov

Special Rescission Rule: If a reportable policy sale is rescinded (canceled), you must file a corrected Form 1099-LS within 15 calendar days of receiving notice of the rescission. You must also furnish corrected statements to the payment recipient and issuer within the same 15-day timeframe.

Extension Requests: You could request an automatic 30-day extension by filing Form 8809 by the original due date. Under certain hardship conditions, an additional 30-day extension was available. However, extensions must be requested proactively—they don't apply automatically to late filers. IRS.gov

Key Rules or Details for 2019

Who Must File

You must file Form 1099-LS if you are the "acquirer" of any interest in a life insurance contract in a reportable policy sale. An acquirer includes anyone who obtains an interest through either direct or indirect acquisition. However, you may not need to file if: (1) the interest was transferred to you gratuitously (as a gift); (2) you qualify for an exception under Treasury Regulations Section 1.6050Y-2(f)—such as being a foreign person, already reporting under other sections, or acquiring the contract in a Section 1035 exchange; or (3) another acquirer or third-party contractor reports on your behalf under unified reporting provisions.

What Is a Reportable Policy Sale

A reportable policy sale occurs when you acquire an interest in a life insurance contract and, at the time of acquisition, you have no substantial family, business, or financial relationship with the insured person apart from your interest in the policy itself. This definition captures most life settlement transactions where investors purchase policies from strangers.

Separate Form Required

You must file a separate Form 1099-LS for each payment recipient with respect to each life insurance contract acquired. If you acquired multiple policies or paid multiple recipients in a single transaction, multiple forms are required.

Payment Recipient Definition

A payment recipient is any person who receives payment in the reportable policy sale. This includes the seller (the person transferring the policy) and any broker or intermediary who retains a portion of the proceeds. However, a non-seller is not considered a payment recipient if they received less than $600 in aggregate payments from the transaction.

Issuer Notification

You must furnish a copy of Form 1099-LS (Copy C) to the insurance company issuer, but only when: (1) the form relates to the seller (not brokers or intermediaries), and (2) your acquisition was a direct acquisition. Copy C should be sent to the administrative office that processes ownership transfers. Note that reporting the payment amount to the issuer is optional on Copy C. IRS.gov

Step-by-Step (High Level)

Step 1: Gather Required Information

Collect the following for each reportable policy sale: acquirer's name, address, telephone number, and taxpayer identification number (TIN); payment recipient's name, address, and TIN; issuer's name; policy number; amount paid to the payment recipient; and the date of sale.

Step 2: Obtain or Verify TINs

Ensure you have correct taxpayer identification numbers for all payment recipients. Use Form W-9 to request TINs from sellers and intermediaries. Incorrect or missing TINs can lead to backup withholding requirements and penalties.

Step 3: Complete the Form

Fill out a separate Form 1099-LS for each payment recipient and each policy. Enter your information as the acquirer in the payer section. Box 1 reports the amount paid to the payment recipient. Box 2 reports the date of sale. Include the policy number and issuer's name in the designated fields.

Step 4: File with the IRS

For paper filing: Submit Copy A of all Forms 1099-LS along with Form 1096 (Annual Summary and Transmittal) to the appropriate IRS Service Center based on your location. For the 2019 tax year, paper forms were due by February 28, 2020. For electronic filing: File through the IRS FIRE (Filing Information Returns Electronically) system by March 31, 2020. Electronic filing is required if you file 250 or more information returns of any type.

Step 5: Furnish Statements to Recipients

Provide Copy B to each payment recipient by the same deadline as IRS filing (February 28 for paper, January 31 in later years). Furnish Copy C to the insurance company issuer (when required) by the same deadline. You may truncate the recipient's TIN (show only last four digits) on recipient copies for privacy, but you must report the complete TIN to the IRS.

Step 6: Retain Records

Keep Copy D for your records along with all supporting documentation. The IRS recommends retaining these records for at least four years from the due date of the return. IRS.gov

Common Mistakes and How to Avoid Them

Mistake #1: Missing the Filing Requirement Entirely

Many acquirers, especially those new to life settlements, don't realize they have reporting obligations. Solution: If you purchase life insurance policies as investments or as part of your business, consult with a tax professional to understand your reporting obligations under Section 6050Y.

Mistake #2: Failing to File for Each Payment Recipient

When a transaction involves multiple parties—the seller, a broker, and perhaps other intermediaries—some acquirers mistakenly file only one form. Solution: File a separate Form 1099-LS for each person or entity that receives $600 or more (or any amount for the seller) from the transaction.

Mistake #3: Incorrect or Missing TINs

Using the wrong taxpayer identification number is one of the most common errors. Solution: Always request Form W-9 from payment recipients before completing the transaction. Verify that the TIN matches the name exactly as it appears on tax records. Use the IRS TIN Matching program if available.

Mistake #4: Reporting Wrong Date

The date of sale should be the actual transaction date when the policy ownership transferred, not when funds were disbursed or contracts were signed. Solution: Clearly define the sale date in your transaction documents and use that date consistently.

Mistake #5: Forgetting to Notify the Issuer

When required, acquirers sometimes fail to send Copy C to the insurance company. Solution: Determine whether your acquisition qualifies as a "direct acquisition" requiring issuer notification, and maintain accurate records of issuer contact information.

Mistake #6: Not Correcting Rescinded Transactions

When a policy sale falls through after reporting, some acquirers forget to file corrected forms. Solution: Implement procedures to track rescissions and file corrected Form 1099-LS within the required 15-day window.

Mistake #7: Treating All Policy Transfers as Reportable

Not every life insurance transfer requires Form 1099-LS. Transfers to family members or business partners with substantial relationships to the insured are generally not reportable. Solution: Review the specific exceptions in Treasury Regulations Section 1.101-1(c)(2) before filing. IRS.gov

What Happens After You File

For the IRS

Once you submit Form 1099-LS, the IRS adds the information to its records and uses it to verify that payment recipients properly report the transaction on their income tax returns. The IRS matches the amounts you report against the recipients' tax returns through its automated matching systems.

For Payment Recipients

Sellers and other payment recipients must use the information from Form 1099-LS to properly report the transaction on their tax returns. For the seller, the tax treatment can be complex: part of the sale proceeds may be tax-free (to the extent of premiums paid), part may be ordinary income (to the extent of prior deductions for premium payments), and part may be capital gain. Recipients who don't report the transaction or report it incorrectly may receive IRS notices proposing adjustments.

For the Issuer

The insurance company that receives Copy C has its own reporting obligation. Upon receiving Form 1099-LS, the issuer must file Form 1099-SB (Seller's Investment in Life Insurance Contract) to report the seller's investment in the contract. This creates a complete information trail that helps the IRS determine the correct tax treatment.

Penalties for Non-Compliance

If you fail to file Form 1099-LS, file late, or file with incorrect information, the IRS may assess penalties. For 2019, penalties ranged from $50 to $270 per form depending on how late the filing occurred, with a maximum penalty of $556,500 per year for small businesses (higher for larger businesses). Intentional disregard carries even steeper penalties of $550 per form with no maximum limit.

Backup Withholding

If a payment recipient fails to provide a correct TIN or if the IRS notifies you that the recipient is subject to backup withholding, you must withhold 24% of reportable payments and remit it to the IRS. IRS.gov

FAQs

Q1: Do I need to file Form 1099-LS if I purchased a policy from a family member?

A: Generally, no. Form 1099-LS is required only for "reportable policy sales," which specifically exclude transactions where the acquirer has a substantial family, business, or financial relationship with the insured. If you purchased a policy insuring your spouse, parent, child, or other close family member, the transaction likely isn't reportable. However, if you're purchasing a policy that insures a stranger (even if you're buying from a family member who owns it), the transaction may be reportable.

Q2: What's the difference between Form 1099-LS and Form 1099-SB?

A: Form 1099-LS is filed by the acquirer (buyer) of the policy and reports payments made to the seller and intermediaries. Form 1099-SB is filed by the insurance company issuer and reports the seller's investment (basis) in the contract. These two forms work together to give the IRS complete information about the transaction. You, as the acquirer, are only responsible for Form 1099-LS.

Q3: If I paid less than $600 to a broker, do I still need to report it?

A: No. Payment recipients other than the seller are not considered reportable if they received less than $600 in aggregate payments from the reportable policy sale. However, you must always report payments to the seller regardless of the amount.

Q4: Can I file Form 1099-LS electronically?

A: Yes. For the 2019 tax year, electronic filing was encouraged and required if you filed 250 or more information returns of any type. Electronic filing extends your deadline from February 28 to March 31. Use the IRS FIRE (Filing Information Returns Electronically) system, which requires software that meets IRS Publication 1220 specifications.

Q5: What if I acquire an interest in a partnership or trust that owns a life insurance policy?

A: This may constitute an "indirect acquisition" of an interest in the life insurance contract and could trigger Form 1099-LS reporting requirements. The regulations specifically address this scenario. Review Treasury Regulations Section 1.101-1(e)(3)(ii) or consult a tax professional to determine your obligations.

Q6: I made a mistake on the form I already filed. How do I correct it?

A: File a corrected Form 1099-LS as soon as you discover the error. Check the "CORRECTED" box at the top of the form, enter all information (both correct and incorrect information may be needed depending on the error), and file it with the IRS. Also furnish corrected copies to the payment recipient and issuer (if applicable). There's no specific deadline for corrections, but file as promptly as possible to minimize potential issues.

Q7: What happens if the policy sale falls through after I've already filed?

A: You must file a corrected Form 1099-LS within 15 calendar days of receiving notice of the rescission. Mark the form as "CORRECTED" and adjust the reported amounts to reflect that the transaction did not occur (typically reporting zero amounts). Also furnish corrected statements to recipients within the same 15-day timeframe. This is one of the few situations with a strict statutory deadline for corrections. IRS.gov

Notes & Sources

Sources: All information in this summary is derived from official IRS publications, including the Instructions for Form 1099-LS (Rev. December 2019), Form 1099-LS (Rev. December 2019), and the 2019 General Instructions for Certain Information Returns.

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