Form 1099-LS: Reportable Life Insurance Sale – A Complete Guide for 2023

If you've sold or purchased a life insurance policy outside your family, you may encounter Form 1099-LS. This relatively new tax form tracks life insurance transactions in the secondary market—a world that can feel complicated but doesn't have to be. This guide breaks down everything you need to know about Form 1099-LS for the 2023 tax year in plain English.

What Form 1099-LS Is For

Form 1099-LS exists to report "reportable policy sales"—transactions where someone buys a life insurance policy from someone they don't have a substantial family, business, or financial relationship with. Think of it as the IRS's way of tracking life insurance policies that change hands in the marketplace, particularly in life settlement transactions where investors purchase policies from individuals who no longer want or need them.

The form serves two main purposes: First, it alerts the IRS that a life insurance policy has been sold in a way that might have tax consequences. Second, it provides crucial information to the insurance company issuing the policy so they know the death benefit may be taxable when eventually paid out. This is important because normally, life insurance death benefits aren't taxed—but when a policy has been sold to someone without that close relationship to the insured person, special rules under Internal Revenue Code Section 101(a)(3) apply.

Who files this form? The "acquirer"—meaning the person or company buying the policy—is responsible for filing. If you're the seller, you'll receive a copy but won't file it yourself. The form captures basic but essential information: the amount paid to each person involved in the transaction, the date of the sale, the policy number, and the insurance company's name. IRS.gov

When You’d Use Form 1099-LS (Including Late and Amended Filings)

For 2023 transactions, the standard filing deadline was February 28, 2024, for paper filers or April 1, 2024, if filing electronically. Acquirers needed to submit Form 1099-LS to the IRS by these dates and provide copies to both the payment recipients (typically the seller and any brokers involved) and the insurance company. Note that for 2023 returns, the e-filing threshold remained at 250 information returns, though this dropped to 10 for returns filed in 2024 and later years. IRS.gov

What if you missed the deadline or made a mistake? You'll need to file a corrected form. Mark the "CORRECTED" box at the top of a new Form 1099-LS with the accurate information and submit it as soon as possible. The IRS generally allows corrections within the statute of limitations, which typically provides a three-year window from the original filing date for making amendments.

There's also a special circumstance called a "rescission"—when a reportable policy sale is canceled or undone. If this happens, you must file a corrected Form 1099-LS within 15 calendar days of receiving notice of the rescission. You'll also need to furnish corrected statements to the payment recipient and insurance company within the same 15-day window. This tight deadline ensures everyone involved can adjust their tax reporting promptly. IRS.gov

Key Rules or Details for 2023

Understanding what makes a sale "reportable" is crucial. According to IRS regulations, a reportable policy sale occurs when someone acquires any interest in a life insurance contract through a direct or indirect acquisition, and the acquirer doesn't have a substantial family, business, or financial relationship with the insured person—apart from their interest in that policy. The classic example is a life settlement company purchasing a policy from an elderly individual they've never met before.

However, not all transfers trigger reporting. Several important exceptions exist under Regulations section 1.101-1(c)(2). These include certain transfers between family members, specific business-related transfers, and Section 1035 exchanges (where one life insurance policy is swapped for another similar policy). Additionally, if someone acquired the policy gratuitously (as a gift) rather than purchasing it, different rules may apply.

The form requires reporting for each payment recipient separately. A payment recipient includes any person that receives payment in a reportable policy sale—this includes the seller and any brokers or intermediaries involved. However, there's a de minimis exception: if someone other than the seller received less than $600 in the transaction, they don't need to be reported as a payment recipient.

For 2023, the e-filing requirement applied if you had 250 or more information returns in total. The Taxpayer First Act of 2019 authorized the IRS to reduce this threshold, and Treasury Decision 9972 published in February 2023 lowered it to just 10 information returns for filings due on or after January 1, 2024. IRS.gov

Step-by-Step (High Level)

Step 1: Determine if Reporting Is Required

The acquirer must first evaluate whether the transaction qualifies as a reportable policy sale. Ask: Did I acquire this policy from someone I don't have a substantial family, business, or financial relationship with? If yes, and no exceptions apply under the regulations, you'll need to file.

Step 2: Gather Necessary Information

Before filing, collect taxpayer identification numbers (TINs) for all payment recipients, the policy number, the insurance company's name and address, and documentation of all amounts paid. Using Form W-9 early in the transaction process helps avoid delays and penalties for missing or incorrect TINs.

Step 3: Complete Form 1099-LS for Each Payment Recipient

Enter your information as the acquirer in the appropriate boxes. Then, for each person who received payment (seller, brokers, intermediaries receiving $600 or more), complete a separate form showing their name, address, TIN, the amount they received (Box 1), and the sale date (Box 2). Include the insurance company's name and the policy number in the designated fields.

Step 4: File with the IRS

Submit forms electronically through the IRS's Information Returns Intake System (IRIS) or another authorized e-file provider. If you qualify for paper filing (fewer than 250 forms for 2023), you can mail them to the appropriate IRS processing center along with Form 1096 as a transmittal.

Step 5: Furnish Statements to Recipients

Provide Copy B to each payment recipient and Copy C to the insurance company. For 2023 transactions filed in 2024, statements to payment recipients were due by February 15, 2024, according to the General Instructions for Certain Information Returns. These copies inform recipients of the amounts reported to the IRS and help them complete their own tax returns accurately.

Step 6: Retain Records

Keep Copy A and supporting documentation for at least three years in case of IRS inquiries or audits. IRS.gov

Common Mistakes and How to Avoid Them

Mistake #1: Misidentifying Whether a Sale Is Reportable

Not every life insurance transfer requires Form 1099-LS. Many filers incorrectly report transfers between family members or routine business transactions. Solution: Carefully review the relationship between the acquirer and the insured person. If there's a substantial family, business, or financial relationship (beyond just the policy interest), it's likely not reportable under Section 101(a)(3).

Mistake #2: Failing to Collect TINs Early

Waiting until filing time to request Tax Identification Numbers causes delays and increases penalty risk. Solution: Have all sellers and intermediaries complete Form W-9 as part of the purchase agreement process, before any money changes hands. The General Instructions for Certain Information Returns emphasize the importance of accurate TIN collection.

Mistake #3: Reporting Incorrect Amounts

Some acquirers report the policy's face value or death benefit instead of what they actually paid. Others forget to report payments to brokers or intermediaries. Solution: In Box 1, report only the actual cash or consideration paid to each recipient. Track every payment of $600 or more to anyone involved in the transaction.

Mistake #4: Missing the Furnishing Deadline

While filing with the IRS has one deadline, providing copies to payment recipients and the insurance company has its own deadline—and missing it can result in separate penalties. Solution: Prepare all copies simultaneously and distribute them together to ensure everyone receives their forms on time.

Mistake #5: Ignoring the Issuer Copy Requirement

Many acquirers forget they must send Copy C to the life insurance company. This is critical because the issuer needs this information to properly report the eventual death benefit. Solution: Always send Copy C to the insurance company's administrative office that processes ownership transfers—this information should be included in your policy documents. Note that reporting the amount paid (Box 1) is optional on Copy C furnished to the issuer.

Mistake #6: Not Correcting Rescinded Sales Promptly

If a sale falls through or is canceled, you have just 15 calendar days to file corrections under Regulations section 1.6050Y-2(e). Missing this tight window results in penalties and creates confusion for all parties. Solution: Establish a system to monitor sale finalizations and immediately file corrected forms if any transaction is reversed. IRS.gov

What Happens After You File

Once you've filed Form 1099-LS, the IRS processes it and matches the information against tax returns filed by the payment recipients. For sellers, receiving Form 1099-LS means they need to report the sale on their own tax return. The tax treatment typically involves a combination of ordinary income and capital gains, depending on their basis in the policy.

The insurance company receiving Copy C uses this information to update their records. When the insured person eventually passes away and the death benefit is paid, the company will issue appropriate tax forms showing any taxable portion of the death benefit. Without Form 1099-LS, the insurance company wouldn't know the policy had been sold and might incorrectly treat the entire death benefit as tax-free.

If you made an error on the original form, you can file a corrected Form 1099-LS at any time, though sooner is always better. Mark the "CORRECTED" box and enter the accurate information. You'll also need to furnish corrected copies to all recipients who received the original incorrect form.

The IRS may assess penalties for late or incorrect filings. According to the 2023 General Instructions for Certain Information Returns, penalties are assessed on a tiered basis depending on how quickly corrections are made. The penalty structure for 2023 includes increasing amounts based on the delay in filing or correcting returns. Intentional disregard of filing requirements carries much steeper penalties with no maximum limit.

The acquirer should also retain documentation supporting the amounts reported, including purchase agreements, payment records, and correspondence about the transaction. These records become especially important if the IRS questions the reporting or if disputes arise about the transaction terms. IRS.gov

FAQs

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

No, typically not. Reportable policy sales specifically exclude transactions where you have a substantial family, business, or financial relationship with the insured person. Buying your spouse's policy, purchasing a policy on your parent, or similar family transactions generally don't require Form 1099-LS. However, if you're buying a policy on a distant relative you've never met as an investment, that might be reportable.

Q2: I'm the seller—do I need to file Form 1099-LS?

No. The acquirer (buyer) is responsible for filing Form 1099-LS. As the seller, you should receive Copy B of the form, which you'll use when preparing your tax return. You'll report the sale proceeds on your Form 1040.

Q3: What's the difference between Form 1099-LS and Form 1099-SB?

Form 1099-SB (Seller's Investment in Life Insurance Contract) is a companion form that the insurance company files to report the seller's investment (or "basis") in the policy. Form 1099-LS reports the acquisition itself and the amounts paid. Think of it this way: the acquirer files 1099-LS showing what they paid, while the insurance company files 1099-SB showing what the seller had invested over the years. Together, these forms help calculate the correct tax liability. IRS.gov

Q4: Can I truncate Social Security numbers on forms I give to recipients?

Yes. When furnishing Copy B to payment recipients, you may truncate their Social Security number or other TIN, showing only the last four digits (for example, XXX-XX-1234) pursuant to Regulations section 301.6109-4. However, you must include the full TIN on forms filed with the IRS. You may never truncate the acquirer's TIN on any version of the form. IRS.gov

Q5: What if I acquired the policy through a partnership or trust?

This can be tricky. Acquiring an interest in a partnership, trust, or other entity that holds a life insurance policy may constitute an indirect acquisition of an interest in that policy under Regulations section 1.101-1(e)(3)(ii). Whether it's reportable depends on your relationship with the insured person and the structure of the acquisition. You may want to consult a tax professional for these complex scenarios.

Q6: I bought a policy in December 2023 but didn't close until January 2024. Which year do I report?

Report the transaction in the year the sale was completed and you paid for the policy interest—in this case, 2024. The "date of sale" you enter in Box 2 should be the actual closing date when ownership transferred, not the date you signed a purchase agreement or began negotiations.

Q7: What penalties apply if I file late or incorrectly?

The penalty structure depends on how quickly you correct errors or file late returns. According to the General Instructions for Certain Information Returns, penalties are assessed in tiers based on timing. For 2023, penalties increase based on the length of the delay. Intentional disregard of filing requirements carries minimum penalties with no maximum cap. The best approach is to file accurately and on time—the penalties can add up quickly, especially if multiple forms are involved. IRS.gov

Key Takeaway: Form 1099-LS ensures the IRS can track life insurance policies sold in the secondary market and properly tax the eventual death benefits. While the form may seem complex, breaking it down into steps—determining if reporting is required, gathering information, filing accurately, and furnishing copies to recipients—makes the process manageable. When in doubt, consult the official IRS instructions at IRS.gov/Form1099LS or a tax professional, especially for complex transactions involving indirect acquisitions or business entities.

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