What Form 1099-LS (2020) Is For
Form 1099-LS (2020) is an Internal Revenue Service (IRS) tax form used to document a reportable life insurance sale. It applies when a life insurance contract or policy is sold or transferred to an unrelated third party. This reporting ensures that both the payment recipients and the life insurance carrier meet their tax obligations under the Internal Revenue Code.
The form helps the IRS verify miscellaneous income, settlement amounts, and potential tax implications, such as ordinary income or capital gain from the transaction. If you incur a penalty for filing errors or late submissions, you may be eligible for IRS penalty abatement for filing errors to help minimize or remove those fines.
When You’d Use Form 1099-LS (2020)
You must use Form 1099-LS (2020) when a reportable policy sale occurs between unrelated parties or when ownership of a life insurance policy changes hands.
- Reportable policy sale: This applies when a life settlement or viatical settlement occurs, where an acquirer, without a substantial family or financial relationship, buys a life insurance contract for cash or other consideration.
- Multiple payment recipients: This is required when more than one payment recipient receives $600 or more from the transaction, such as co-owners or brokers.
- Foreign persons and unified reporting provisions: This is necessary when the acquirer is a foreign person or when another filer handles reporting under unified reporting provisions.
- Amended or rescinded transactions: This applies when a sale is corrected, canceled, or requires updated recipient statements after the original filing has been submitted.
Knowing how the IRS collection process works can help you respond quickly to any compliance notices related to a life insurance sale.
Key Rules or Details for the 2020 Tax Year
These key details outline the main filing requirements and conditions that applied to Form 1099-LS (2020) during the 2020 tax year.
- Person responsible for filing: The individual or entity holding the acquirer’s interest in the life insurance contract is responsible for filing with the IRS and providing statements to all relevant parties.
- Due dates: The insurance issuer must receive Copy C by January 15, while all payment recipients must receive their copies by February 15, ensuring timely compliance.
- Electronic filing: Filers submitting 250 or more tax forms must use electronic filing through the IRS e-file or FIRE system. Smaller filers may use paper or online fillable copies.
- Furnish statements: The acquirer must furnish statements containing the payment recipient’s TIN, telephone number, and relevant policy number to ensure proper verification.
- TIN and SSN requirements: Each payment recipient must provide a valid taxpayer identification number or social security number to avoid withholding and penalty notices.
- Foreign persons: Special filing rules under Section 1.6050Y-2 of the regulations and related Internal Revenue Code provisions apply when the acquirer or seller is a foreign person.
Step-by-Step (High Level)
The following steps summarize the proper tax filing process for Form 1099-LS (2020).
- Determine if you are the acquirer: Confirm whether you are the direct acquirer or involved in an indirect acquisition of an interest in a life insurance policy.
- Gather information: Collect all necessary details, including names, addresses, policy number, premiums paid, date of sale, and cost basis of the life insurance contract.
- Complete the form: Fill out the required boxes showing the settlement amount, seller’s investment, and cash surrender value, and verify the information in the contact and administrative office fields.
- Distribute copies: Send Copy A to the IRS, Copy B to payment recipients, and Copy C to the life insurance carrier for proper recordkeeping.
- File electronically: Submit the form using e-file or the IRS FIRE System, or attach Form 1096 (annual summary) when filing by paper.
- Keep records: Retain all tax forms, recipient statements, and third-party information for a minimum of three years, in case of audits or verification requests.
If you need a representative to handle IRS communications or filings on your behalf, consider using a Power of Attorney for IRS communications.
Common Mistakes and How to Avoid Them
Avoiding common filing errors for Form 1099-LS (2020) ensures compliance with the Internal Revenue Service and prevents costly penalties.
- Incorrect or missing TINs: Always verify the payment recipient’s TIN through the IRS TIN Matching service before submitting the form to avoid mismatch notices and fines.
- Missed due dates: Record all due dates on your calendar; penalties increase if the form is filed after the January 15 issuer deadline or the February 15 recipient deadline.
- Incorrect form year: Use the correct tax form for the reported tax year; outdated or mismatched versions, such as 2019 forms, cannot be used for transactions in 2020.
- Poor form quality: Never submit photocopies; use official red-ink IRS forms or online fillable copies to ensure the federal government can properly process your filing.
- Omitted recipients: File a separate form for every payment recipient receiving $600 or more in reportable payments to meet IRS reporting obligations.
- Neglecting rescission updates: If a reportable policy sale is rescinded, file a corrected return within 15 days of receiving notice and furnish updated recipient statements to all parties.
Be sure to resolve unfiled individual returns so all reportable life insurance sale proceeds are properly reported and taxed.
What Happens After You File
After filing Form 1099-LS (2020), the IRS matches your report with the seller’s tax return to confirm accuracy. The life insurance carrier then files Form 1099-SB, reporting the seller’s investment, premiums paid, and cost basis for determining any tax owed. This process helps calculate potential ordinary income or long-term capital gain from the sale of a life insurance policy.
Maintain all statements furnished, copies, and correspondence for at least three years, and review any developments related to filing requirements on the IRS website. For guidance on life insurance settlements, IRS forms, or tax debt, start your case review with our expert team today.
FAQs
What is considered a reportable policy sale?
A reportable policy sale occurs when there is a direct or indirect acquisition of a life insurance contract by someone who has no substantial family or financial relationship with the insured. These transactions typically involve life settlement or viatical settlement agreements, which are made for cash or other consideration.
What’s the difference between Form 1099-LS and Form 1099-SB?
Form 1099-LS reports the settlement amount paid to the seller, while Form 1099-SB shows the seller’s investment, including premiums paid and cash surrender value. Both forms help determine whether the gain is taxable or ordinary income from the sale.
Can I file Form 1099-LS electronically?
Yes, you can file using electronic filing through the IRS FIRE System or e-file platform. You may also use online fillable copies available directly on the IRS website to streamline the submission process.
What happens if I file late or incorrectly?
If you file late or submit incorrect information, the IRS may assess penalties that increase based on the length of the filing delay or the severity of the error. Prompt correction helps minimize potential fines.
